In the ever-evolving landscape of the crypto market, 2023 proves to be a year of formidable challenges. The crypto world is at a crossroads as central banks respond to inflationary pressures with rapid interest rate hikes and geopolitical tensions cast a cloud of uncertainty.
This article delves into the key factors influencing the trajectory of the crypto market: tight monetary policy, the resurgence of the US dollar, and lingering inflation fears. We also explore the evolving role of cryptocurrencies, and Bitcoin in particular, in terms of global finance and stability.
Johnny Louey is a research analyst at LTP.This article is part of his CoinDesk articles Current status of Cryptocurrency Weeksponsored by Chainalysis.
The chart below shows the impact of quantitative tightening by the Federal Reserve and the European Central Bank in 2023. Quantitative tightening involves central banks selling Treasury securities, which leads to higher yields. This upward pressure on government bond yields will be exacerbated by aggressive rate hikes. As a result, these yields reached their highest level this year.
With yields on long-term government bonds soaring above 4%, funds are flowing out of riskier assets like cryptocurrencies and into these safer alternatives, pushing the US dollar higher and pushing the crypto market higher. Demand and liquidity are declining.
Record yields on government bonds since 2008 and steady US dollar strength since July are putting downward pressure on cryptocurrencies as well as stocks. The market correction that began in July was broad-based and coincided with a surge in DXY, a measure of the dollar's value relative to other currencies, to a year-to-date high.
In response to multiple banking crises in March 2023, the Federal Reserve introduced the Bank Treasury Facility Program (BTFP) to help banks facing devaluations of Treasury holdings and liquidity strains. supported. This measure contributed to alleviating the liquidity crisis. The Fed's future direction remains uncertain, as there are currently no signs of an end to quantitative tightening or plans to cut interest rates. Therefore, deep-rooted concerns now revolve around inflation.
The graph below shows that both US gas prices and oil prices have risen noticeably, reaching their highest levels this year.
The current state of the cryptocurrency market reveals that total trading volume has declined since the beginning of the year, reflecting a decline in the risk appetite of both institutional and retail investors.
The decline in trading volume could certainly be due to a combination of factors.
First, increased SEC enforcement and prosecution of the crypto industry has created a sense of regulatory uncertainty, leading some market participants to adopt a more cautious approach and reduce risk. I did.
Second, the implementation of restrictive monetary policies has led to a capital outflow from riskier crypto markets to safer financial instruments.
Finally, increased geopolitical uncertainty has led to risk aversion, leading investors to reduce their exposure to potentially immature assets like cryptocurrencies.
Some argue that Bitcoin could eventually serve as a store of value similar to gold, but it has yet to establish itself as a widely accepted safe asset class. As institutional adoption of cryptocurrencies increases around the world, Bitcoin speculation has become more important than its mainstream use as a store of value.
Bitcoin demand appears to be primarily driven by speculative activity rather than fundamentals-based investment behavior, as evidenced by the significant dominance of derivatives trading over spot trading on crypto exchanges. (The average trading volume of derivatives in 2023 is approximately four times the spot trading volume). Recent price increases have been primarily driven by retail exuberance and volatility movements rather than stable institutional demand. Without widely accepted regulations and use cases similar to traditional currencies or stores of value, Bitcoin's potential as a widespread safe haven remains uncertain.
In the short term, we expect crypto market activity and volatility to remain limited due to macroeconomic and geopolitical factors that constrain speculative flows. The SEC has repeatedly delayed the filing of high-profile Bitcoin ETFs, blocking mainstream adoption channels. Regulatory approval is essential for Bitcoin to become institutional and a true safe-haven asset for investors around the world. Broad institutional awareness and participation is essential to reduce reliance on speculative flows and increase their viability as a portfolio diversifier during periods of volatility.
