The Last Look…
Posted by Colin Lambert. Last updated: January 17, 2023
The Bitcoin bulls are back with a bang, accompanied by the usual predictions, but are they missing a point with this latest move?
I would point anyone interested in this in the direction of the excellent weekly analysis from B2C2. As a major player in cryptocurrencies, obviously the firm has a good window on events and the latest missive highlights how the move from $16,000 to $21,000 and change is largely the result of short covering.
Apart from my slight surprise that anyone would want to be structurally short of Bitcoin – there’s negative yield and the market wasn’t moving – this insight told me that one of the big challenges facing the cryptocurrency remains. There is, at heart, a lack of interest.
Of course, this could all blow up in my face – just look at the 2023 Trade of the Year – but I wonder if what we are seeing is a market that is losing interest? Price action has been very muted in recent months, with the highlights being the drop of about $5,000 after the collapse of FTX and the rebound, of $5,000, as shorts were covered. In between, price action has been very limited and lacking in opportunity, so the next few weeks will be telling for the market’s prospects for 2023. If we settle into a $1,000 range for weeks on end around these levels, then effectively the opportunity for a significant move higher is still low.
Retail investors especially have short memories, so a few may be jumping on the bandwagon, but this is another aspect of the next few weeks’ price action. As highlighted by the timing of the resurgence in bullishness from the evangelists (like the first swallow heralds summer, so after Bitcoin hit $21,000 I received my first prediction of $100,000 this year) any new longs are likely to be around $20,000. The market structure in crypto has become more efficient and as such moves develop and occur quicker, so if you have the info you have to jump. You wonder of the mindset of investors that have gone long around 20k if price action just dies again? At the moment, the market structure is the worst of both worlds – if you’re wrong, there is no easy and immediate ‘out’.
On a related point, someone made an interesting observation to me to the other day – as we have reported, FX volumes with hedge funds and proprietary trading firms in the latest BIS Triennial Survey were some 13% or $80 billion per day less than in 2019. It was suggested that the opportunities in crypto were proving irresistible to these firms and that was why they were less involved in FX.
The next month or so in crypto is going to be critical…it doesn’t really matter which way the market moves, as long as it does actually move.
Personally I am not convinced by this argument, fair though it is, because there were plenty of opportunities in FX in 2022, it could be argued over the last six months of the year they were greater than in crypto. I suspect the improved use of analytics by customers and LPs in FX has meant some of the HFT-type firms have been squeezed out of the market – equally, the venues these firms like best in FX have seen volumes decline to the point they are often dealing with each other – every HFT’s nightmare!
It will be interesting to see what happens if price action and volumes dry up again in crypto, will these firms still see the opportunity, or will they look to get back into FX? If they do return, they will find a market more predicated upon the relationship, which may not suit their book, but if crypto isn’t moving, what else do they do? Join the race to the bottom in US equities?
All of this suggests that the next month or so in crypto is going to be critical. It doesn’t really matter which way the market moves, as long as it does actually move. If it doesn’t, and all we have seen over the past week is the squaring of positions and exiting of the market by another round of players, then 2023 could still be a very long year for anyone hoping to benefit from crypto volatility and volumes.