3 reasons why it could be a rocky week for Bitcoin, Ethereum and altcoins

Continuing the trend of 2022, there is a lack of positive enthusiasm in the crypto market. While Bitcoin (BTC) and altcoins have remained stagnant to start 2023there are a few reasons why volatility could increase in January.

Market capitalization during the holiday period of 2022. Source: Arcane Research

Winklevoss letter to DCG causes FUD bankruptcy

On January 2, Cameron Winklevoss, co-founder of Gemini, wrote an open letter to Digital Currency Group (DCG) founder Barry Silbert, demanding answers about the $900 million in blocked client funds. Gemini launched the “Earn” program in coordination with Silbert but $900 million of client money has been blocked since November 16 due to DCG liquidity problems. Following the letter, Crypto Twitter started generating FUD towards DCGbelieving that there will be liquidity problems similar to 3 Arrows Capital and FTX.

The financial strain that the large Gemini hole could place on DCG is significant because they may be forced to sell sizeable GBTC and ETHE positions, along with other positions in trusts run by sister company Grayscale. According to arcane investigationanother path for DCG to meet debt obligations would be to initiate a Reg M distribution, which would allow GBTC and ETHE position holders to redeem them for the underlying assets at a 1:1 ratio.

Vetle Lunde, Senior Analyst at Arcane Research, noted:

“A Reg M would trigger a massive arbitrage strategy of selling crypto instead of buying Grayscale Trust shares. If this scenario plays out, crypto markets could face further disadvantage.”

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Grayscale fiat holdings of circulating supply. Source: Arcane Research

Fear is high and liquidity is low

The DCG and Gemini drama comes during a period in the market where sentiment is low. Despite the evidence that investors plan to participate in crypto in 2023, most market participants are not optimistic and are reluctant to commit to risky assets. The index currently sits at 26 on a 100-point scale, which is the same as December.

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Fear and greed index. Source: Alternative.me

Such a high level of fear is even more significant during periods of low liquidity. Market activity continues to fall, reaching volumes not seen since the introduction of Binance zero trading fees for BTC pairs the 24th of June. Low spot trading volumes suggest that the muted market share will continue into early this year.

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BTC volume with and without Binance. Source: Arcane Research

If DCG were to go the Reg M path and spot market volume were to remain low, a correction in cryptocurrency prices could become sharper in the near term.

The upcoming economic calendar hints at possible volatility

As shown below, the macro markets are off to a busy start to 2023:

Wednesday January 4:

  • ISM manufacturing PMI (US manufacturing activity)
  • US JOLT (job openings)
  • Minutes of the Federal Open Market Committee (FOMC) meeting

Thursday January 5:

Friday January 6:

  • Nonfarm Payrolls and Unemployment Data
  • ISM Non-Manufacturing PMI (a survey of business conditions)

Sunday January 8:

  • Gemini’s settlement offer to DCG expires

Thursday January 12:

  • US Consumer Price Index (CPI) Inflation Report

Friday January 13:

  • US banks begin Q4 2022 earnings reports

If the numbers are below expectations or something out of the ordinary occurs, 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 too long:

“These periods of low volatility rarely last very long, and periods of volatility compression were often followed by wild moves, even in stagnant markets.”

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BTC volatility 7 and 30 days. Source: Arcane Research

Some analysts believe that the US CPI report for January 12 show a spike in inflation. If this is the case, the Federal Reserve may continue to raise interest rates, which has caused the market capitalization of cryptocurrencies to decrease in the past.

With the possibility of further interest rate hikes combined with current market sentiment, the possible bankruptcy of DCG, and declining market liquidity, the crypto market could react with another drop to the downside.