It is the calm before the storm on the crypto markets

Key points

• Crypto volatility has declined and extreme on-chain activity has subsided in times of relative calm
• However, some worrying developments around Genesis, Gemini and DCG are still ongoing
• Volatility could also arise once US inflation data is released this week
• The period is reminiscent of the less dramatic environment before the FTX in October

After a turbulent rollercoaster ride after the shocking decline of FTX, a period of remarkable calm has dawned on the cryptocurrency markets.

With 2022 being a complete and utter bloodbath, it almost feels suspicious that there are even a few weeks of little drama in the digital market space.

But the figures show that the last few weeks have been among the quietest in recent years. Fear of infectionthat resulted from the collapse of FTX, this is a good thing.

There is still fear in crypto circles

However, there is a lot to be concerned about right now. As Coinbase CEO Brian Armstrong noted yesterday when he announced that Coinbase another 20% will cut its workforce, there are likely to be “more shoes to drop” and there is “still a lot of market fear.”

Crypto lender Genesis laid off 30% of its workforce last week and is reportedly considering bankruptcy. Crypto exchange Gemini, founded by the Winklevoss twins, has $900 million in customer assets stuck in limbo with Genesis, its sole lending partner for its Earn product.

The twins have called on Barry Silbert, CEOP of Digital Currency Group (DCG), which owns Genesis, to resign, accusing him of defrauding Gemini Earn customers.

DCG fired back, calling it “another desperate and unconstructive publicity stunt by Cameron Winklevoss to deflect blame.” It also reiterated that it “preserves all legal remedies in response to these malicious, false and defamatory attacks.”

DCG is also the parent company of the Grayscale Bitcoin Trust, which has seen a massive discount to its net asset value, reaching a high of 50% following the FTX collapse as investors questioned whether the reserves were safe (I have yesterday written about GBTC).

Markets remain stable for now

While all these episodes are playing out, the markets remain stable for now. Activities have been relatively subdued, and there has even been a noticeable return to normal levels for many on-chain activities that have gotten out of hand in recent periods.

The following snapshot shows the net transfer volume in and out of the exchanges. Activity has been lukewarm since the beginning of the year, after reaching extreme levels in November and December when first FTX collapsed and then questions about the State of Binance arose.

This idea that activity has returned to normal is reinforced when looking at Bitcoin’s volatility. The world’s largest cryptocurrency has been trading sideways for some time, and the 30-day Pearson volatility measure shows how it saw a noticeable drop to pre-FTX levels in December.

Macroclimate looks more optimistic

It wasn’t just a breather within crypto circles. The broader macro environment is looking at least a little brighter today than it did last month. Inflation is still widespread, but there have been two consecutive readings that have come in below expectations, and there is renewed hope that it may have peaked.

The latest round of rate hikes has pushed rates up 50 basis points, up from 75 basis points in the previous two months, and while Fed Chair Jerome Powell and other central bank chiefs have reiterated that rates will continue to rise until inflation is defeated, the market has moved cautiously higher after European inflation came in at 9.2%, up from 10.1% last month.

Next up is the US CPI report on Thursday, which as always will be a very important day for the markets. Volatility is expected in the crypto markets as coins stare at the numbers to gauge what Jerome Powell will do in terms of interest rate policy.

After all, we now know that cryptocurrencies follow the stock market – except for the cases where high-ranking executives are exposed as fraudsters (FTX) or the top 10 coin ceases to exist (LUNA).

It never gets boring in the crypto world

At the end of October, Bitcoin was seemingly trapped in a crab move around $20,000. As traders grew impatient, I warned that cryptocurrencies could be just one event away from a strong downtrend.

Three weeks later, FTX collapsed. I never thought this would happen and the timing was coincidental, but the premise of the article reminds me of how I feel now. It’s amazing how short memory is in the markets, but we’ve been here before.

Crypto won’t stay quiet for long, and the asset class is far from out of the woods. The above-mentioned goings-on around DCG, GBTC, Genesis, and Gemini are just a few of the millions of things that could turn around at any moment.

There is also the story of Binance CEO Changpeng Zhao being investigated by the SEC for money laundering offenses, there is the firing of 20% of Coinbase’s workforce after its stock price plummeted 90%, and God knows what the testimony in Sam Bankman-Fried’s trial will reveal.

And then there’s the macro level, where anything can happen with inflation, the Russian war in Ukraine, or countless other variables. It’s been a quiet few weeks, but don’t worry – the madness will return soon.