Bitcoin bounced back on Thursday and then it wasn’t as investors seemed concerned about stubborn inflation, Federal Reserve monetary policy and troubles in the crypto industry.
The largest digital asset by market cap recently traded at around $23,618, down 4.8% over the past 24 hours and well below its high of over $25,100 earlier in the day. This level represented BTC’s first stay above $25,000 since August, reflecting rising optimism about inflation and the economy. But both seemed to disappear within hours when an unexpected monthly rise in the producer price index (PPI) of 0.7% in January suggested the Federal Reserve had yet to tame price hikes that were driving the troubled economy for more than a year.
Industry-specific issues throughout the day also served as a reminder that crypto itself remained on rocky ground as investment bank DA Davidson analyst Chris Brendler downgraded Coinbase (COIN) from “buy” to “neutral”; A New York judge overseeing Sam-Bankman Fried’s criminal fraud case has warned he could revoke the bail of the former CEO of disgraced crypto exchange FTX if Bankman-Fried continues to defy bail terms; and decentralized finance (DeFi) protocol Platypus Finance suffered a lightning lending attack with a potential loss of $8.5 million.
Ether followed a similar path as BTC, surging well above $1,700 for the second day in a row before pulling back. The second largest crypto by market cap recently changed hands at around $1,650, down more than a percentage point. Other major cryptos also fluctuated with APT, the token of Layer 1 protocol Aptos, recently down 7.9% after rising more than 9% earlier in the day. MATIC, the native crypto of the Layer 2 blockchain Polygon network, is up over 6.3% despite lower gains from earlier. Popular meme coins DOGE and SHIB were both firmly in the red a day after the sharp surge.
The CoinDesk Market Index, a measure of the overall performance of crypto markets, recently fell about 3.8% after spending much of the past 36 hours in the green.
Equity markets, meanwhile, winced at the PPI data, with the tech-heavy Nasdaq, the S&P 500 and the Dow Jones Industrial Average (DJIA) all falling well over a percentage point. Investors remain skeptical of a strong labor market, an inflationary sign that suggests economic growth remains solid.
Still, the recent crypto rally has left a number of analysts bullish on prices. “The [consumer price index] has played a less influential role in the US as more evidence shows that fighting inflation has proven tenacious and investors are adapting and cautiously entering risky assets as a means of coping,” Adrian Wang, founder and CEO of Digital Asset management company Metalpha Limited said ahead of Thursday’s downturn.
“We can expect the market to become more bullish going forward,” he said.
And Darius Tabatabai, the co-founder of Vertex Protocol, a London-based decentralized exchange, said that the crypto markets appeared poised to overcome the myriad of problems the industry was facing. “The news that the [Securities and Exchange Commission] examined [stablecoin] BUSD led to some price decline earlier this week, but as the market seems to be slowly shaking off the news and retail data, it suggests a soft landing in inflation and we could have the makings of another bull market,” Tabatabai said.
Alameda Research’s contagion effects continue as startups postpone their token launches
The crypto market is struggling with an “Alameda gap” as several projects postpone their token launch plans due to lack of liquidity despite rising Bitcoin (BTC) and Ether (ETH) prices.
Data from crypto price-tracking platform CoinMarketCap shows that new coin applications have declined over the course of 2022, from 10,264 in Q1 to 6,350 in Q4. The decline accelerated towards the end of the year after crypto exchange FTX and its sister firm Alameda Research collapsed in November. Before the bankruptcy, Alameda was one of the largest market makers, providing billions of dollars in liquidity to large-cap and small-cap tokens.
To date, there are only 3,000 applications.
“After FTX, we’ve seen liquidity dry-up of up to 50% in major coins,” Guilhem Chaumont, CEO of Paris-based market maker and brokerage Flowdesk, said in an email. “At smaller market caps, the liquidity reduction has been even worse as Alameda has ended all support for token issuers and other major market makers have reduced exposure and activity.”
Chaumont said he advises delaying projects by three to six months. Flowdesk expects the bear market to continue for another 12 to 18 months.
Last month, recently decentralized exchange dYdX announced that it plans to delay its token activation, which would release more than 150 million tokens to early investors and founders, to December 2023 in hopes that the market will settle down by then will have recovered. People familiar with the matter say it was due to concerns about market liquidity.
Liquidity in the bitcoin and ether markets, as measured by the 2% depth of market, has dried up since the collapse of Alameda, making it harder for traders to fill large orders without impacting the market price and for projects new tokens to spend
The 2% depth represents a collection of buy and sell orders within 2% of the mid-price – the average of the bid and ask/ask prices quoted at a given point in time. Data collected by Paris-based Kaiko shows that the market depth for BTC has fallen from 2% in January to less than 8,000 BTC, even as the cryptocurrency is up over 40%.
“Crypto liquidity is dominated by just a handful of trading companies including Wintermute, Amber Group, B2C2, [CoinDesk sister company] Genesis, Cumberland, and (the now defunct) Alameda. With the loss of one of the largest market makers, we can expect a significant drop in liquidity, which we will refer to as the “Alameda Gap,” Kaiko wrote in a November briefing note.
Data from Arkham Intelligence shows balances at key market makers have fallen. Cumberland currently has a balance of $75 million, down from around $220 million in early December; Wintermute has $122 million, compared to $1.7 billion last February and $4 billion at the end of October 2021, when the bull market was at its peak.
The Amber Group, which ditched a sponsorship deal with British football club Chelsea in December, has faced several rounds of layoffs. Arkham says it currently has a balance of $92 million, down from a peak of about $350 million in mid-2022.
This isn’t necessarily a bad thing, said March Zheng, co-founder and managing partner of Bizantine Capital.
“Cryptomarkets are cyclical in nature, but they need stress test conditions like those of the last few months to prove their long-term resilience,” he told CoinDesk in a note. “The issuance of new tokens has been declining, but it offers more opportunities for established and top projects.”
Bitcoin was just below $25,000, marking its strongest level since August 15. Digital asset strategist Joe Orsini shared his market reaction. Prosecutors also asked a judge to amend the terms of FTX founder Sam Bankman-Fried’s bail release to bar him from using cell phones or the internet except under very specific conditions. Securities attorney James Murphy intervened after the co-signers of the Bankman-Fried bond became known.