Market analysis with Mike Ermolaev
This week, Mike Ermolaev, our resident crypto market expert, keeps analyzing the turbulent crypto landscape in GoMarket Weekly's 25th installment. With Bitcoin's value fluctuating, crypto market players are scratching their heads over what's really behind these market mood swings. According to Mike, among the recent factors influencing the market are statements from U.S. Federal Reserve Chair Jerome Powell, which have acted like a long-awaited rain on the parched crypto market, eager for fresh investment inflows. Also, with tensions running high, Pavel Durov's latest legal troubles have got the whole tech and crypto community holding its collective breath. The story so far is just the beginning – we'll explore the most pivotal moments and what they might mean for the industry’s future. Crypto newcomers, Bitcoin mining trends, and groundbreaking developments in digital asset wealth are also featured in this report.
Bitcoin's Volatile Ride Amid Fed Speculation
Over the past week, Bitcoin's price has fluctuated between $58,059 and $64,668, coming tantalizingly close to breaking the $65,000 mark. The rally began last Friday after U.S. Federal Reserve Chair Jerome Powell stated that inflation is "on a sustainable path back to 2%." This statement drove Bitcoin's price above $62,000, sparking a wave of optimism across the markets.
The market is now laser-focused on the upcoming Federal Reserve meeting on September 18. Investors are eagerly speculating on a potential rate cut, with current projections indicating a 67.5% chance of a 0.25% reduction and a 32.5% likelihood of a more substantial 0.5% cut. These probabilities are based on the CME FedWatch Tool, which closely monitors market expectations. According to the tool, the current target rate is 525-550 basis points, with a significant shift expected if the Fed decides to ease its monetary policy. Should the Fed move forward with rate cuts, it could further fuel Bitcoin's rally, as lower interest rates typically push investors toward riskier assets like cryptocurrencies, which are seen as offering higher returns in a low-yield environment.
Massive Inflows into Digital Assets Triggered by Powell's Comments
In response to Powell's comments, the cryptocurrency market experienced a significant inflow of $533 million into digital asset investment products, marking the largest weekly gain in over five weeks.
Source: CoinShares
In response to Powell's comments, the cryptocurrency market experienced a significant inflow of $533 million into digital asset investment products, marking the largest weekly gain in over five weeks. Analysts at CoinShares attributed the inflow directly to Powell’s speech, revealing the palpable connection between the Fed's actions and crypto market psychology.
Notably, Bitcoin was the primary focus, receiving an inflow of $543 million, which actually exceeded the total market inflows due to some minor outflows in other assets. The majority of these Bitcoin inflows occurred on Friday, right after Powell's comments, suggesting a direct response to the possibility of upcoming rate cuts.
Regionally, the United States dominated the inflows, capturing $498 million, reflecting strong local investor interest in digital assets in response to US monetary policy. Other regions such as Hong Kong and Switzerland also saw positive inflows of $16 million and $14 million, respectively. However, Germany experienced minor outflows totaling $9 million, making it one of the few countries with net outflows year-to-date.
Some Experts Believe Rate Cuts Could Backfire
Meanwhile, a more cautious approach is taken by experts who don't think rate cuts are the answer to everything – and their doubts deserve attention if we want to see the whole picture.
Former BitMEX CEO Arthur Hayes has written a new essay in which he criticizes the current U.S. government's approach to lowering interest rates. He believes this strategy is more politically motivated—aimed at Jerome Powell's reappointment—rather than focused on genuine economic goals.
Hayes suggests that the U.S. does not need rate cuts; instead, he warns of potential risks due to the differences in interest rates between the Federal Reserve, the Bank of Japan, the Bank of England, and the European Central Bank. He emphasizes that the U.S. is highly dependent on Japan, its largest holder of U.S. government bonds. Economically, Hayes believes the Fed should be increasing rates to maintain stability. He cautions that an abrupt unwinding of yen carry trades—due to a rapid strengthening of the yen—could trigger market volatility that outweighs the benefits of minor rate reductions in USD, GBP, or EUR. Although rate cuts might temporarily boost the economy and increase liquidity, Hayes points out that since 2020, the U.S. Consumer Price Index has surged by 22%, and the Fed’s balance sheet has grown by over $3 trillion. This suggests that the Fed’s actions may be driven more by political goals than by sound economic management. Hayes warns that narrowing the interest rate gap between the yen and other currencies could prompt a rapid yen carry trade unwind, potentially destabilizing global markets unless central banks intervene with significant measures like expanding their balance sheets.
Bitcoin Faces Narrow Trading Range Amid Market Caution and Potential Volatility
Despite the initial bullish reaction to Powell's speech, Bitcoin’s price action remained relatively contained. On the night of Saturday, August 24, Bitcoin breached the $64,000 level, briefly approaching $65,000. However, it failed to break through this psychological resistance and subsequently pulled back.
Furthermore, Nvidia’s earnings report triggered a "sell the news" reaction in the crypto markets, causing Bitcoin to slip back to $59,000, as investors, having anticipated the positive results, chose to take profits and reallocate funds to more stable assets.
Analysts from QCP Capital predict that Bitcoin will remain within a tight trading range of $62,000 to $67,000 in the short term due to ongoing market uncertainty.
The firm noted that while there is optimism following Powell's speech at Jackson Hole, this has not been enough to overcome the prevailing caution in the market. This hesitancy is evident in the lack of a significant increase in implied volatility. However, QCP Capital stated, "We believe that any dip in equities (and crypto) will be short-lived. With Powell and the Fed ready to kickstart a rate-cutting cycle, increased liquidity will eventually push risk assets higher. We are finally on the cusp of a rate-cutting cycle." This suggests that while investors remain cautious, there is growing confidence that upcoming changes in U.S. monetary policy could soon provide a boost to the market.
While QCP Capital remains optimistic about a near-term recovery driven by anticipated monetary easing, blockchain analytics firm Glassnode offers a more cautious outlook. Its on-chain metrics reveal that net capital inflows into Bitcoin have slowed significantly, with only 11% of days experiencing smaller inflows, excluding bear market periods. The MVRV Ratio, which measures average unrealized profit, has reset to its long-term average of 1.72, a critical level that has historically marked a shift between bull and bear markets. Similarly, the percentage of supply in profit has returned to its mean value, aligning with conditions seen during major corrections in 2016, 2019, and mid-2021.
Source: Glassnode
Additionally, the perpetual swap markets, which reflect speculative interest and leverage in Bitcoin, have seen a marked decline in liquidation volumes, especially compared to the $3.6 billion daily inflows during Bitcoin's peak in March. Currently, net realized profit/loss is at just +$15 million per day, indicating a significant reduction in speculative activity and leverage. Despite this temporary equilibrium, history suggests that such periods often precede substantial volatility spikes as the market adjusts. With 12.5% of Bitcoin’s supply now in the 3-6 month age band and likely transitioning to long-term holder status, traders should brace for potential turbulence ahead, presenting both risks and opportunities depending on their market strategies.
Source: Glassnode
Pavel Durov's Legal Troubles and Market Reactions
French authorities made a bold move, arresting Pavel Durov at Paris' Le Bourget airport. The French judiciary has accused Durov of facilitating criminal activities through Telegram due to the platform's lack of strict moderation and its reluctance to cooperate with law enforcement agencies. Durov was later released under judicial supervision, subject to a bail of €5 million, required to report to the police twice a week and barred from leaving the country.
Source: Tribunal-de-paris.justice
French President Emmanuel Macron clarified that the arrest of Pavel Durov in France was conducted as part of a judicial proceeding and is not politically motivated.
A single arrest, and suddenly the tech and crypto landscapes are ablaze with fiery opinions, as Durov's fate sparks a wider conversation.
Elon Musk, CEO of Tesla and SpaceX, voiced his support for Durov through a series of posts on his social media platform, X. Musk reacted to the news of Pavel Durov's arrest with a post that sarcastically commented, "Check out this ad for the First Amendment. It is very convincing." His reaction underscores his critical stance on what he perceives as excessive government intervention and censorship, further emphasized by his earlier statement, "Moderation is a propaganda word for censorship."
Vitalik Buterin, a major player in the Ethereum universe, fired off a sharp critique, warning this "looks very bad and worrying for the future of software and comms freedom in Europe".
Additionally, Justin Sun, the founder of Tron, proposed the creation of a FreePavel DAO, expressing his readiness to donate $1 million "if it is created in a decentralized way with sufficient community support."
It was at this moment that the TON community praised Durov's unshakeable resolve to safeguard online freedoms and decentralized systems. United, the call went out to ride the storm and "stay calm, united, and to keep building", solidifying their promise to "freedom of speech and decentralization".
The instant tension arose, and Telegram put out a statement to reassure users that it's fully compliant with EU laws, including the recently introduced Digital Services Act.
As authorities detained Pavel Durov, cyber-attacks that appear to be sympathetic to his cause began hitting high-profile French websites, including government and media platforms.
Source: X
Resilience in the Bitcoin Mining Sector Amid Economic Shifts
A recent report from JPMorgan estimates the U.S. Bitcoin mining market at $74 billion, reflecting substantial growth despite recent economic shifts. The four-year block reward revenue opportunity, estimated at $37 billion, has seen a 19% decline since early June but remains 85% higher year-on-year.
The mining sector's resilience is also evident in the relatively stable Bitcoin Hashprice Index, which measures the revenue earned by miners per petahash per day in USD. Although there have been minor fluctuations, the index has generally remained stable, suggesting that the mining community is weathering market conditions well.
Crypto Millionaires and Billionaires Surge in 2024
The past year has seen a substantial increase in the number of crypto millionaires, which has surged by 95% to reach 172,300 individuals, according to the Crypto Wealth Report 2024 by Henley & Partners. Crypto's wealthiest elite has grown substantially, with a 27% surge in billionaires, now numbering 28.
The upper echelon of crypto's wealthiest elite has also expanded significantly. The number of centi-millionaires, those holding at least $100 million in crypto assets, has grown by 79% to 325 individuals. Meanwhile, the number of Bitcoin centi-millionaires has doubled, reaching 156. In the billionaire category, crypto billionaires have increased by 27%, totaling 28, while Bitcoin billionaires have seen an impressive 83% growth, now numbering 11.
The global adoption of cryptocurrency is on the rise, with the total number of crypto users reaching 560 million, a 32% increase from the previous year. Bitcoin users, specifically, have grown by 31%, now accounting for 275 million people worldwide.
Concluding Thoughts
If we scrape beneath the surface, a truer story of what's driving the cryptocurrency market right now begins to take shape. As market participants keenly watch the Federal Reserve's next move and anticipate potential rate cuts, the crypto landscape remains both volatile and full of potential. We're witnessing an unprecedented creation of crypto wealth – newly minted millionaires and billionaires are springing up left and right, alongside an explosive growth in the global user base, firmly cementing digital assets as a legitimate force.
August 30, 2024
