Crypto bankruptcy proceedings to slow the sell-off that triggered the bear market – Kaiko
(Kitco News) There could be a pause in the massive liquidations that have sparked this crypto winter, as many top players are not allowed to touch assets until bankruptcy proceedings are resolved, according to the Kaiko cryptocurrency market data provider.
Last week, the crypto space was in the midst of a strong relief rally, with Ethereum outperforming Bitcoin. As of this writing, the rally has slowed. Bitcoin was trading at $21,486, up 3.4% on the day, and Ethereum at $1,490, up 8.6% on the day.
“The last few months have been very difficult for the cryptocurrency markets. There were a lot of liquidity problems, and especially all the bankrupt lending companies created a lot of problems. The more liquid cryptocurrencies were the hardest hit because they are usually the first to get liquidated when you need to consolidate your balance sheet, repay a loan or exit volatile markets,” Clara Medalie, Kaiko’s research director, told Kitco News in a recent interview.
After Bitcoin fell to $17,000 in mid-June, the cryptocurrency likely bottomed out. And so is the rest of the crypto market, Medalie said. “We may have bottomed out. Several indicators suggest the markets could turn around,” she said. “Overall, cryptocurrency markets are still highly correlated. Typically, when Bitcoin goes up, other markets go up. Cryptocurrency markets will be at their peak when we see a divergence in correlations between different cryptocurrencies. currencies. At present, they are still very closely linked.”
A major signal is the bankruptcy proceedings in which loan companies like Celsius, Voyager and 3AC are involved, which will halt the wave of exits.
“Because all of these companies are in bankruptcy proceedings, it will be some time before they are allowed to liquidate the assets they hold,” Medalie pointed out. “It could have put an end to the liquidations that have caused the bear market in recent months. What has been liquidated in the short term could be all there is in the coming months. Due to the numerous legal proceedings against them, they’re probably not allowed to touch what they’re holding until they get approval from the legal authorities.”
However, the risk of contagion in crypto is still there as more information is revealed about who lent money to whom.
“Almost every day we still see new revelations about who has loaned 3AC money or deposited in degrees Celsius. We are still seeing the aftermath of the collapse of these major crypto entities. But that is definitely slowing down,” said added Medalie.
The next big event for crypto will be how the market reacts to the likely 75 basis point hike by the Federal Reserve – the second consecutive rate hike of this magnitude.
“The main drivers of the current cryptocurrency markets have mostly been macro. It will be interesting to see what happens after the next Fed meeting. This will be a strong indicator of how the crypto markets react to the macro movements over the next few months,” Medalie noted. “Most macro correlations don’t look too good for Bitcoin right now.”
Bitcoin has a fairly strong inverse correlation with the US dollar – when the dollar goes up, Bitcoin goes down. “And with the dollar hitting decade highs over the past few months against most other Fiat currencies, that makes it difficult,” she said.
Additionally, Bitcoin has had a relatively high correlation with tech stocks. “And that’s, again, not the best sign because most stocks have been in very steep declines, almost into bearish territory over the past few months,” she added.
Bitcoin will likely remain sensitive to macroeconomic signals such as the latest inflation data or unemployment numbers until global markets stabilize or inflation declines, and the Fed essentially neutralizes its monetary activity, a underlined Medalie.
“Right now, we are still in the midst of a historic interest rate hike that the Fed will be rolling out over the next few months,” she noted. “When you have higher interest rates, it deters investors from pouring funds into riskier assets.”
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The Paris-based digital asset data provider is also monitoring Ethereum Merge developments. This is what has sparked a strong rally in Ethereum over the past two weeks, with the cryptocurrency surging by 44%.
“The news that a final date for the Ethereum merger has been set for September 19 was the first time the developers gave a definitive date. And so what we are seeing is the merger rally, with very excited investors,” Medalie described.
This is the largest upgrade in the history of the network, especially because the Ethereum network is the largest in terms of total number of users. Even though Bitcoin has the highest market capitalization in the space, as a network it is not used by as many protocols as Ethereum.
“It will be interesting to see how Ethereum Merge increases the use of DeFi protocols, especially decentralized exchanges. It has been difficult to achieve widespread adoption due to high transaction fees on the Ethereum blockchain, and fees are expected to be significantly reduced after merging it,” Medalie added. “This can be a strong incentive to increase both liquidity on decentralized exchanges and overall market efficiency and the price discovery process.”
A useful metric that Kaiko uses when trying to forecast if the bear market is over in crypto is trading volumes.
“When trading volumes are stable or falling, that means most people are just taking a wait-and-see approach. They don’t want to pour money into crypto right now. But if trading volumes are high or steadily increasing, then that’s usually a good sign,” Medalie said. “When you see spikes in trading volume, it usually means prices are falling.”
What investors want is a sustained increase in volumes over time. “That’s what worries some investors especially when they look at exchanges like Coinbase or other exchanges whose volumes have fallen over the past few months. This suggests that more institutional capital is leaving the markets,” he said. she noted.
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