3 reasons why it’s a tough week for Bitcoin, Ethereum and altcoins

There is no positive excitement in the cryptocurrency market, which continues with the trend of 2022. While Bitcoin (BTC) and altcoins remain stagnant through 2023, there are several reasons why volatility increased in January.

Market prices during the 2022 holiday period. Source: Arcane Research

Winklevoss letter to DCG adds to FUD’s bankruptcy

On January 2, Gemini co-founder Cameron Winklevoss wrote an open letter to Digital Currency Group (DCG) founder Barry Silbert demanding answers about $900 million in locked client funds. Gemini launched the “Gazan” program in coordination with Silbert, but DCG has closed $900 million of customer money since November 16 due to liquidity problems. After the letter, Crypto began generating FUD towards DCG, believing it had liquidity problems similar to Twitter, 3 Arrows Capital and FTX.

The financial strain a Big Gemini hole could put on DCG is significant, as they could be forced to sell their large GBTC and ETHE positions, among other positions in trusts run by sister company Grayscale. According to Arcane Research, another way for DCG to meet its debt obligations would be to launch a Reg M distribution that would allow holders of GBTC and ETHE positions to redeem them for underlying assets at a 1:1 ratio.

Arcane Research senior analyst Vetle Lunde noted:

“A Reg M will lead to a massive arbitrage strategy of selling cryptocurrency versus buying Grayscale Trust shares. If this scenario happens, cryptocurrency markets could fall even further.”

Gray trust holdings of circulating supplies. Source: Arcane Research

Fear is high and liquidity is low

The DCG and Gemini drama comes at a time when market sentiment is down. Despite the evidence that investors plan to participate in cryptocurrency in 2023, most market participants do not feel bullish and do not want to deal with risky assets. Currently, the index is 26 out of 100 points, as it was in December.

Index of fear and greed. Source: Alternative.me

Such a high level of fear is even more important in times of low liquidity. After Binance introduced zero trading fees for BTC pairs on June 24, market activity continues to decline, reaching unprecedented volumes. Low spot trading volume suggests continued weak market participation early this year.

BTC volume with and without Binance. Source: Arcane Research

If DCG takes the Reg M route and spot market volume remains low, the correction in cryptocurrency prices could intensify in the short term.

The upcoming economic calendar hints at possible volatility

As shown below, macro markets are busy through 2023:

Wednesday, January 4:

  • ISM manufacturing PMI (US factory activity)
  • US JOLTs (Jobs)
  • Federal Open Market Committee (FOMC) meeting minutes

Thursday, January 5:

Friday, January 6:

  • Non-farm payroll and unemployment data
  • ISM non-manufacturing PMI (business conditions survey)

Sunday, January 8:

  • The Gemini solution offer to DCG ends

Thursday, January 12:

  • US consumer price index (CPI) inflation report

Friday, January 13:

  • US banks start reporting earnings in the 4th quarter of 2022

If the numbers fall short of expectations or if something unusual happens, the stock market may react by selling.

Reduced spot volumes combine 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 have previously been accompanied by sharp moves even in stagnant markets.”

BTC 7 and 30 day volatility. Source: Arcane Research

Some analysts believe the January 12 US CPI report will show a jump in inflation. If so, the Federal Reserve may continue to raise interest rates, which has caused the cryptocurrency’s market value to decline in the past.

With current market sentiment, a potential DCG bankruptcy, and reduced market liquidity likely to lead to further interest rate hikes, the cryptocurrency market may react with another dip.