Interviews
Crypto bankruptcy proceedings to slow massive selloffs that triggered the bear market – Kaiko
(Kitco News) There could be a pause in massive liquidations that triggered this crypto winter, as many prominent players are not allowed to touch assets until bankruptcy proceedings are resolved, according to cryptocurrency market data provider Kaiko.
Last week, the crypto space was amidst a strong relief rally, with Ethereum outperforming Bitcoin. At the time of writing, the rally 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 past few months have been very tough for cryptocurrency markets. There were a lot of liquidity issues, and especially all of the lending firms going through bankruptcy proceedings created a lot of issues. More liquid cryptocurrencies were hit the most because they are typically the first ones that are liquidated when you need to shore up your balance sheet, repay a loan, or exit volatile markets," Kaiko's research director Clara Medalie told Kitco News in a recent interview.
After Bitcoin tumbled to $17,000 in mid-June, the cryptocurrency likely found its bottom. And the same applies to the rest of the crypto market, Medalie said. "We might have hit bottom. Several indicators suggest that markets could be turning around," she said. "Overall, cryptocurrency markets are still very correlated. Typically, when Bitcoin rises, other markets will rise. Cryptocurrency markets will be at their peak when we see a divergence in correlations across different cryptocurrencies. Right now, they're still very closely tied."
One major signal is bankruptcy proceedings in which lending firms like Celsius, Voyager, and 3AC are involved will pause the wave of outflows.
"Because all of these firms are in bankruptcy proceedings, it's going be a while before they are allowed to liquidate assets that they're holding," Medalie pointed out. "That could have put a pause on the liquidations that caused the bear market over the past few months. What has been liquidated in the short-term future could be all there is in the next few months. Because of the so many legal procedures against them, they're likely not allowed to touch what they're holding until they get approvals from the legal authorities."
However, the contagion risk in crypto is still out there as more information gets revealed regarding who loaned money to whom.
"Almost every day, we still see new reveals of who had loaned money to 3AC or deposited in Celsius. We're still seeing the after-effects of the collapse of these large crypto entities. But it's definitely slowing down," Medalie added.
The next big event for crypto will be how the market reacts to the Federal Reserve's likely 75-basis-point hike — the second rate increase of that magnitude in a row.
"The key drivers of current cryptocurrency markets have mostly been macro. It will be interesting to see what happens after the next Fed meeting. That will be a strong indicator of how crypto markets will react to macro movements over the next few months," Medalie noted. "Most macro correlations aren't looking too good for Bitcoin right now."
Bitcoin has a pretty strong inverse correlation with the U.S. dollar — when the dollar rises, Bitcoin falls. "And with the dollar hitting decade highs over the past few months versus most other Fiat currencies, it is making things difficult," she said.
Also, Bitcoin has had a relatively high correlation with tech equities. "And this is, again, not the best sign because most equities have experienced a very sharp drawdown, almost bear market territory over the past few months," she added.
Bitcoin will likely remain sensitive to macro signals like the latest inflation data or unemployment numbers until global markets stabilize or inflation falls, and the Fed essentially neutralizes their monetary activity, Medalie pointed out.
"Right now, we're still in the midst of a historic increase in interest rates that the Fed will be rolling out over the next few months," she noted. "When you have higher interest rates, it dissuades investors from pouring funds into riskier assets."
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Paris-based digital assets data provider is also watching the Ethereum Merge developments. This is what triggered a strong rally in Ethereum over the past two weeks, with the cryptocurrency rising 44%.
"News that a final date for the Ethereum Merge has been set for September 19 was the first time developers have given a definitive date. And so what we're seeing is the merge rally, with investors getting very excited," Medalie described.
It's the most significant upgrade in the history of the network, especially because the Ethereum network is the largest in terms of the total number of users. Even though Bitcoin has the highest market cap in the space, as a network, it is not as used by as many protocols as Ethereum.
"It will be interesting to see how Ethereum Merge increases the use of DeFi protocols, specifically decentralized exchanges. It has been hard to gain widespread adoption due to the high transaction fees on the Ethereum blockchain, and fees are expected to be drastically reduced after the merge," Medalie added. "This can be a strong incentive to increase both liquidity on decentralized exchanges and the overall market efficiency and price discovery process."
One helpful metric Kaiko uses when trying to forecast if the bear market is over in crypto is trading volumes.
"When trade volumes are flat or falling, it means that most people are just taking a wait-and-see approach. They don't want to pour money into crypto at this time. But if trade volumes are high or steadily rising, then that's typically a good sign," Medalie said. "When you see spikes in trade volume, it typically means a price crash."
What investors want to see is a sustained increase in volumes over time. "That's what has worried some investors specifically when looking at exchanges like Coinbase or some other exchanges that have had fallen volumes over the past few months. That suggests that more institutional capital is exiting the markets," she noted.
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