Why are Bitcoin and Ether down so much: Crypto winter or liquidity reset?

Turning Point?

The Trump administration has created a more constructive backdrop for cryptoassets in the US, and therefore globally. Trade tensions in April sparked a selloff but recovery, as with stocks, was swift.

On 10 October renewed US-China trade tensions sparked a broad selloff in risk assets that forced a cascade of selling as leveraged positions were forced to liquidate longs.

Since then it looks like liquidity in crypto markets has dried up even as the stock market in the US has rallied to fresh all-time highs. By contrast, Bitcoin and Ether ETF flows have dried up. The question is whether crypto markets are acting as a higher beta proxy for risk that is a leading indicator for stocks, which seem to have benefitted from a rotation into some more defensive parts of the market.

Investors had been quite exposed to leverage so when it turned they had to sell – the move below $100k exacerbated things as retail started to get anxious. ETF outflows left big money reducing exposure – last week saw crypto exchange-traded products hit with their heaviest outflows since February last week, which included a record single-day withdrawal from BlackRock’s signature Bitcoin ETF IBIT on 14 November.

Digital asset exchange-traded products have fallen from a peak of $264bn in early October to $191bn in assets under management, according to Coinshares.

We've also seen the market dial back its expectations for a Fed rate cut in December, which is affecting sentiment towards riskier assets. 

And if we look at sentiment, the AI juggernaut has been kept on track by the massive capex boom, but is looking precarious.

We also cannot ignore fatigue – this market has been bid up for three years straight with a relentlessly positive narrative. 

Futures open interest in Bitcoin has declined and funding rates turned negative, consistent with a downturn.

There is also evidence of long-term holders starting to sell – bitcoin held for at least 155 days or more are starting to enter the market.

So the question is whether this is the start of a crypto winter – a prolonged downturn, or just a normal part of the cycle. Liquidity drying up due to swirling macro headwinds is hardly the market expressing a fundamental doubt about the asset class.

Every single correction in Bitcoin’s relatively short history has led to significant upside for investors. Volatility is likely to lead to investors becoming anxious, but with investing patience usually pays off.

Meanwhile, Michael Saylor of MicroStrategy is buying into the weakness, making his biggest purchase since July by acquiring 8,178 more bitcoins. I looked at the risks with investing in a Bitcoin treasury strategy here.

What could spark a rebound?

Technically – RSI approaches 30 on the daily chart, signalling near-term oversold conditions.

Reopening of the US government and a potential stimulus package from Japan could inject fresh liquidity into markets.

Market dynamics and internals suggest more about a funding stress, lack of liquidity than any paradigm shift in Bitcoin’s fundamentals...(quite what they may be, answers on a postcard pls).

The Fed could still cut interest rates in December – lots depends on the September jobs report on Thursday, delayed by the government shutdown from 3 October. From fairly recently seeing a rate cut as very likely the market has likely gone a little too far the other way because of the shutdown clouding the judgment.

Indeed, the Fed could become more accommodative than the market thinks as the administration is keen to let it “run hot” to finance debt via a combination of nominal GDP expansion and inflation.

We also wait and see whether Cboe’s perpetual-style bitcoin and ether futures, which launch on 15 December, have any market impact.

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