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3 Reasons It Could Be a Tough Week for Bitcoin, Ethereum, and Altcoins

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Continuing the 2022 trend, there is a lack of positive excitement in the cryptocurrency market. While Bitcoin (BTC) and altcoins have remained stagnant in early 2023, there are a few reasons why volatility could increase in January.

Market value during the 2022 holiday period. Source: Arcana Research

Winklevoss letter to DCG triggers FUD bankruptcy

On Jan. 2, Cameron Winklevoss, co-founder of Gemini, wrote an open letter to Digital Currency Group (DCG) founder Barry Silbert, demanding answers about the $900 million in blocked client funds. Gemini launched the “Earn” program in coordination with Silbert, but $900 million of customer money has been locked up since Nov. 16 due to DCG’s liquidity issues. After the letter, Crypto Twitter began generating FUD towards DCG, believing that there were liquidity issues similar to 3 Arrows Capital and FTX.

The financial strain that the Gemini big hole could put on DCG is significant because they could be forced to sell sizable positions in GBTC and ETHE, along with other positions in funds managed by its sister company Grayscale. According to Arcane Research, another avenue for DCG to meet debt obligations would be to initiate a Reg M distribution, allowing holders of GBTC and ETHE positions to redeem them for the underlying assets on a 1:1 basis.

Vetle Lunde, senior analyst at Arcane Research, noted:

“A Reg M would cause a massive arbitrage strategy of selling spot crypto versus buying Grayscale Trust shares. If this scenario pans out, crypto markets could face an even bigger drop.”

Grayscale fiduciary properties of the current supply. Source: Arcane Research

Fear is high and liquidity is low

The DCG and Gemini drama takes place during a time in the market when sentiment is bearish. Despite evidence that investors plan to participate in cryptocurrencies in 2023, most market participants are not optimistic and are reluctant to get involved with risky assets. The index currently sits at 26 on a 100-point scale, which is the same as December.

Index of fear and greed. Source: Alternative.me

Such a high level of fear is even more significant during periods of low liquidity. Market activity continues to drop, reaching volumes not seen since Binance introduced zero trading fees for BTC pairs on June 24. Low spot trading volumes suggest that quiet market participation will continue early this year.

BTC volume with and without Binance. Source: Arcane Research

If DCG follows the Reg M path and spot market volume remains low, a correction in cryptocurrency prices could ensue in the near term.

The upcoming economic calendar hints at possible volatility

As shown below, macro markets are off to a busy start to 2023:

Wednesday, January 4th:

  • ISM Manufacturing PMI (US Factory Activity)
  • US JOLTs (jobs)
  • Federal Open Market Committee (FOMC) meeting minutes

Thursday, January 5th:

Friday, January 6th:

  • Non-Farm Payrolls and Unemployment Data
  • ISM non-manufacturing PMI (a business condition survey)

Sunday, January 8:

  • Gemini liquidation offer for DCG expires

Thursday, January 12th:

  • US Consumer Price Index (CPI) Inflation Report

Friday, January 13th:

  • US banks start reporting Q4 2022 earnings

If the numbers are lower than expected or something out of the ordinary occurs, the stock market may react by selling.

Reduced spot volumes are combined with BTC volatility hitting a 2.5-year low. According to Lunde, the period of low volatility will not last long:

“These periods of low volatility rarely last long, and periods of volatility compression were often followed by sharp movements, even in stagnant markets.”

BTC 7 and 30 day volatility. Source: Arcane Research

Some analysts believe that the January 12 US CPI report will show an increase in inflation. If that’s the case, the Federal Reserve may continue to raise interest rates, which has caused the market cap of cryptocurrencies to fall in the past.

With the possibility of further interest rate hikes combined with current market sentiment, potential DCG bankruptcy and diminishing market liquidity, the crypto market could react with another dip to the downside.