Bitcoin rallied again on Thursday, and it wasn’t as if investors seemed to have second thoughts about inflation, the Federal Reserve’s monetary policy and turmoil 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 off its peak earlier in the day above $25,100. This mark represented BTC’s first stay above $25,000 since August, reflecting growing optimism about inflation and the economy. But both looked set to disappear within hours, as an unexpected 0.7% month-on-month rise in January’s producer price index (PPI) suggested the US Federal Reserve’s monetary policy had yet to succeed in taming the price rises that have damaged finances for more than a year.
Industry-specific issues during the day also provided a reminder that crypto itself remained on rocky ground as investment bank DA Davidson analyst Chris Brendler downgraded Coinbase (COIN) to neutral from buy; a New York judge overseeing the criminal fraud case of Sam-Bankman Fried warned he could revoke the former CEO of disgraced crypto exchange FTX’s bond if Bankman-Fried continued to defy bail conditions; and decentralized finance (DeFi) protocol Platypus Finance suffered a flash loan attack with a potential loss of $8.5 million.
Ether followed a similar path to BTC, rising well above $1,700 for the second day in a row before retreating. The second largest cryptocurrency by market capitalization recently changed hands at around $1,650, down more than a percentage point. Other major cryptos have also seen seeded with APT, the symbol of the layer 1 protocol Aptos, recently falling 7.9% after rising more than 9% earlier in the day. MATIC, the native crypto of layer 2 blockchain Polygon Network was up over 6.3%, despite pairing gains from earlier. Popular meme coins DOGE and SHIB were both solidly in the red a day after rising nicely.
The CoinDesk Market Index, a measure of the overall performance of the crypto markets, recently fell by around 3.8% after spending much of the previous 36 hours in the green.
Stock markets, meanwhile, were reeling from the PPI data with tech-heavy Nasdaq, the S&P 500 and the Dow Jones Industrial Average (DJIA) all falling well over a percentage point. Investors remain wary of a strong labor market, an inflationary sign that suggests economic growth remains solid.
Still, the recent crypto rally has a number of analysts feeling bullish on prices. “(The CPI) in the US has played a less influential role as more evidence shows that inflation has proven stubborn to tackle, and investors are adapting and moving cautiously into riskier assets as a way of coping with the mechanism,” says Adrian Wang , founder and CEO of digital asset management company Metalpha Limited, said before Thursday’s decline.
“We can expect the market to go more bullish going forward,” he said.
And Darius Tabatabai, the co-founder of Vertex Protocol, a London-based decentralized exchange, said crypto markets seemed willing to move past the industry’s myriad problems. “News that the (Securities and Exchange Commission) was investigating (stablecoin) BUSD earlier this week led to some pullback in prices, but as the market appears to be slowly shrugging off the news and retail sales data suggesting a soft landing for inflation, and we may have the basis for a new bull market,” Tabatabai said.
Alameda Research’s contagion effects persist as startups delay their token launches
The crypto market is struggling with an “Alameda gap,” with several projects delaying their token launch plans due to a lack of liquidity despite rising bitcoin (BTC) and ether (ETH) prices.
Data from crypto price tracking platform CoinMarketCap shows that new coin applications fell through 2022, from 10,264 in the first quarter to 6,350 in the fourth. The fall accelerated towards the end of the year after the crypto exchange FTX and sister group Alameda Research collapsed in November. Before going bankrupt, Alameda was one of the biggest market makers, providing billions of dollars of liquidity to tokens with large and small companies.
So far this year, the number is only 3,000 applications.
“After FTX, we have seen liquidity dry up to 50% on 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 because Alameda has shut down all support for token issuers and other major market players have reduced their exposure and activity.”
Chaumont said he recommends delaying projects by three to six months. Flowdesk expects the bear market to last another 12 to 18 months.
Last month, newly decentralized exchange dYdX said it plans to delay its token unlock, which will release more than 150 million tokens to early investors and founders, until December 2023 with hopes that the market will have recovered by then. People familiar with the matter say it is because of concerns over market liquidity.
Liquidity in the bitcoin and ether markets measured at 2% market depth has dried up since Alameda went down, making it more difficult for traders to execute large orders without affecting the market price and for projects to issue new tokens.
The 2% depth represents a collection of the buy and sell orders within 2% of the mid price – the average of the bid and ask/offer prices quoted at a given time. Data tracked by Paris-based Kaiko shows that 2% market depth for BTC fell to less than 8,000 BTC in January, even as the cryptocurrency rose over 40%.
“Crypto liquidity is dominated by just a handful of trading firms, including Wintermute, Amber Group, B2C2, (CoinDesk sister company) Genesis, Cumberland and (the now defunct) Alameda. With the loss of one of the largest market players, we can expect a significant drop in liquidity , which we will call the “Alameda Gap,” Kaiko wrote in a November briefing note.
Data from Arkham Intelligence shows that the balances of key market players have fallen. Cumberland currently has a balance of $75 million, down from about $220 million in early December; Wintermute has $122 million, compared with $1.7 billion last February and $4 billion at the end of October 2021, when the bull market peaked.
Amber Group, which gave away a sponsorship deal with British football team Chelsea in December, has been through several rounds of layoffs. Arkham says it currently has a balance sheet of $92 million, down from a peak of around $350 million in mid-2022.
This is not necessarily a bad thing, said March Zheng, co-founder and managing partner of Byzantine Capital.
“Crypto markets are cyclical in nature, but they need stress test conditions like the past few months to prove their robustness over the long term,” he told CoinDesk in a note. “New token issuance activity has been down, but it provides more opportunities for incumbents and top projects.”
Bitcoin was just shy of $25,000, hitting its strongest level since August 15. Digital asset strategist Joe Orsini shared his market reaction. In addition, prosecutors asked a judge to change the terms of FTX founder Sam Bankman-Fried’s release on bond to prohibit him from using cell phones or the Internet except under very specific circumstances. Securities lawyer James Murphy weighed in after Bankman-Fried’s bond co-signers were revealed.