Bitcoin in consolidation as dollar strength reaches 20-year high

12 Jul 2022

Bitcoin in consolidation as dollar strength reaches 20-year high

Bitcoin has declined below $20,000 after a promising mid-week performance last week but remains within its consolidation range. The Monday sell-off was sparked by a poor weekly open for equities, as the market braces for the CPI release on Wednesday.

Bitcoin (-3.4%) has declined below $20,000 after a promising mid-week performance last week but remains within its $19k-$22k consolidation range.The Monday sell-off was sparked by a poor weekly open for equities, as the market braces for the upcoming CPI release on Wednesday, while global turmoil and recession fears are growing. The dollar strength index has reached a 20-year high while the USDEUR pair has reached parity for the first time since 2003.

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Source: CoinMetrics

Sam Bankman-Fried of FTX noted last week that he thinks that the contagion situation is resolved. As crypto-specific market uncertainty gets resolved, traders should prepare for equity correlations to resume, and we note a slight growth in correlations last week.

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Source: Tradingview (Coinbase, Binance US)

Bitcoin outperforms BNB (-4.2%) and ETH (-7.9%). The Ether sell-off has been particularly interesting as Nexo has apparently sent 100,000+ ETH to centralized exchanges in recent days. Armanino’s Nexo attestations show that Nexo’s customer liabilities have declined to a BTC equivalent of 186,000 BTC, down from 202,636 BTC two weeks ago, suggesting sustained withdrawals from lending platforms.

Bitcoin and stablecoin dominance on the rise amid challenging market conditions

Bitcoin and stablecoins continue to increase their market share amidst souring market conditions as traders continue their flight from risk-on investments to safer assets.

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Source: Bletchley Indexes, Tradingview (Coinbase)

Gains from early July were erased after a weak start to the week in the equity market. Now, Mid Caps is the only index in the green so far in June, up 1.9%. In comparison, both the Large and Small-cap indexes have fallen slightly this month, down 0.9% and 0.1%, respectively.

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Source: CoinMarketCap * Weekly change in percentage points

Ethereum dominance is declining, leading the Large Caps Index dominance to underperform bitcoin. Ether’s relative underperformance may be caused by selling pressure from lenders, as noted above. The stablecoin dominance has grown amidst the current market instability, currently making up around 16.8% of the total crypto market capitalization. While risky crypto investments often are punished by souring market conditions, stablecoins offer market participants a much-needed way to alleviate market volatility risks without having to exit the crypto space entirely. USDC has seen its market share increase 0.19 percentage points over the last week—the biggest upswing among the three largest stablecoins. This occurs in an environment of increased regulatory scrutiny, which, combined with USDC’s proactive regulatory strategies, may have drawn positive attention from market actors.

The record-long extremely fearful market sentiment continues…

Last week’s optimistic uptick continued into the weekend as the Fear and Greed Index briefly climbed to 24. Since then, we have witnessed a perceived weakened market sentiment with the index sitting at 16 as of July 12th. Thus, the index was not entirely able to exit the extremely fearful territory—prolonging the current record-long 68-day streak in this depressing territory.

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Source: Alternative.me

Notably, the metrics’ two most influential components—namely volatility and trading volume—are affected by Binance’s decision to remove trading fees from their platform. To illustrate, the current trading volume is measured against the 30- and 90-day averages and the abolishment of fees naturally incentivized increased trading activity, which by extension can lead the metric to overstate the current market sentiment fearfulness.

Wash trading on Binance leads trading volume to surge

The bitcoin trading volume surged last week, but it was not caused by organic trading activity. Last week, Binance removed its trading fees for several bitcoin pairs to celebrate its five-year anniversary. As noted by Kaiko, the fee removal was quickly followed by surging trading volumes on Binance, likely caused by wash trading from traders seeking to exploit the fee removal to reach higher fee tiers.

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Source: Skew, Tradingview (Binance, Binance US, Bitfinex) *Includes Bitwise 10 exchanges, LMAX, FTX.

On July 8th, Binance’s BTC trading volume reached $11bn, accounting for 84% of the global BTC trading volume. In normal market conditions, Binance represents 50-60% of the spot volume. All other exchanges saw muted trading volume last week, with the seven-day average trading volume sitting near 1-year lows, illustrating that the organic trading activity in the market is very muted at the moment.

Volatility stabilizing at bitcoin settles within $19,000-22,000 range

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Source: Tradingview (Coinbase)

Bitcoin’s seven-day volatility has stabilized at 2.7% as bitcoin remains in consolidation. The 30-day volatility remains high at 4.6%, still impacted by the very volatile days of mid-June amid Three Arrows Capital’s collapse and the contagion-related uncertainty that erupted in the aftermath. In both 2020 and 2021, bitcoin experienced a substantial decline in volatility during the summer months, and after the tumultuous period in May and June, such a period would be welcome. However, given rising global tensions, surging inflation, and wide-reaching pessimism, this summer might offer volatility. The June U.S. CPI release on Wednesday might be a catalyst for a new round of volatility in the market.