The crypto world experienced a jolt last week, reminiscent of the FTX crash, with over a billion dollars in derivatives liquidated on Thursday.
The derivative market’s volume overshadowed the notably low spot volume, and the domino effect of these liquidations could potentially intensify price fluctuations. A significant factor behind this volatility was a sell-off in the bond market.
This turbulence underscores Bitcoin’s susceptibility to the current unpredictable macroeconomic environment. After a prolonged lull in the crypto realm, turbulence resurfaced last week. Late Thursday and early Friday saw crypto markets, led predominantly by Bitcoin, take a nosedive. Bitcoin experienced a 7% drop, marking its most significant single-day decline since FTX’s dramatic downfall last November.
2023 has been marked by a steady, albeit slow, ascent in crypto. Apart from a surge in March due to a regional banking crisis, Bitcoin has largely remained stable, avoiding its characteristic sharp rises and falls.
Delving deeper into last week’s downturn reveals a staggering 8% drop in Bitcoin within a mere ten minutes from 9:35 PM GMT on Thursday. Data from Coinglass indicates this precipitated a wave of liquidations. In total, the day saw over a billion dollars liquidated, making it the most significant day of liquidations since the FTX crash.
This surge in liquidations emphasizes the higher volume in the derivatives market compared to the spot market, which has been notably thin. The order books have been notably sparse since the FTX incident involving Alameda.
So, what triggered the downturn?
The primary catalyst was a bond market sell-off, leading to a spike in yields to multi-year highs. With Bitcoin’s recent tumble in the backdrop of a tightening monetary environment, the latest shift was driven by investors’ anticipation of prolonged high interest rates or potential further rate hikes.
The strong inverse correlation between Bitcoin and yields is evident. Thus, Bitcoin’s recent decline aligns with last week’s bond market events.
This downturn reiterates Bitcoin’s vulnerability in a perplexing macro scenario marked by declining high inflation, juxtaposed with high interest rates, record-low unemployment, and relatively stable economic data.
Turning back to the derivatives market, the shift is further highlighted by the Bitcoin OI-weighted funding rate dipping below -0.01% for the first time since March.
In conclusion, volatility has made a comeback.
The future for crypto?
Opinions on the future trajectory are divided. Some analysts view this as a temporary setback, attributing it to overconfidence following a prolonged calm phase. They believe that a minor uptick in hawkish sentiment won’t drastically alter the course for an economy aiming for a smooth transition.
Conversely, others anticipate a return to the conditions of 2022. If this were to materialize, it could signal the end of crypto’s bear market rally. Given Bitcoin’s sensitivity to global liquidity, a shift towards last year’s tightening could spell trouble.
However, it’s essential to avoid jumping to conclusions. The macroeconomic environment remains unparalleled and challenging to forecast. The Federal Reserve’s recent statements reflect this uncertainty.
Last Wednesday’s meeting minutes highlighted “significant upside risks to inflation,” suggesting further monetary policy tightening. In contrast, July’s minutes indicated the Fed’s belief in declining inflation risks. Jerome Powell even stated that the Fed no longer anticipates a recession.
While these statements aren’t necessarily contradictory, they underscore the prevailing uncertainty.
Once again, Bitcoin finds itself at the mercy of broader market dynamics as it navigates this rapidly evolving landscape.
