The crypto market is down today, as market volatility increases ahead of the Feb. 1 post-Federal Open Market Committee (FOMC) presser where Fed Chairman Jerome Powell will talk about the upcoming interest rate hike and his views on the United States economy.
After jumping to new highs for 2023, Bitcoin (BTC), which pumped 43% in January, and Ether (ETH) retraced a portion of their recent gains. The primary downside catalyst appears to be investors’ apprehension over the upcoming FOMC decision on interest rates and similar pullbacks are also being seen across the stock market which is down. The uncertain FOMC decision brought Bitcoin down to the second-best January on record.
On Jan. 30 a bankruptcy examiner for Celsius submitted a 470-page report that found Ponzi-like use of customer funds. Combined with the Jan. 18 announcement that the United States Department of Justice levied enforcement action against Bitzlato and ramped-up pressure on certain players in the crypto sector, Binance started to block certain users’ accounts and crypto legislation is likely in the crosshairs.
Cryptocurrency market performance, daily timeframe: Coin360
After initially benefiting from a Consumer Price Index (CPI) print which showed inflation slowing beyond expectations in December 2022, crypto and stock prices began to cool as retail data missed expectations and earnings diminished.
U.S. stocks drop ahead of the FOMC
Crypto prices are still highly correlated with the Dow and S&P 500. As mentioned earlier, macro and crypto markets rallied after a better than expected CPI report, but lingering concerns about the health of the U.S. and global economy resurfaced after reported earnings showed a slowdown in corporate profits and consumer demand.
Most major banks still expect the U.S. to experience a sharp recession at some point in 2023.
According to Robert Haworth, Senior Vice President at U.S. Bank, investor sentiment remains low in the current economy:
“Consumer confidence remains low but is recovering to start 2023 from the record low in June 2022. The Michigan Consumer Sentiment Index, at 64.9, is well below average pre-pandemic levels, with consumers remaining concerned about inflation. Incomes continue to rise; personal incomes gained 5.8% on a 5% gain in wages in the fourth quarter and disposable personal income (less taxes) rose 6.5%. However, a rising savings rate during the quarter indicates consumers appear cautious.”
Global economic health. Source: U.S. Bank
Even though the FOMC interest rate hike is expected to be 50 points, major stock indices fell in anticipation of the interest rate announcement. Traders are potentially speculating what the announcement will include to see signs of a pivot.
Interest rate probabilities. Source: CME Group
U.S. crackdown with unclear regulations ripples through the crypto market
The cryptocurrency industry and regulators have a long history of not getting along either due to various misconceptions or mistrust over the actual use case of digital assets.
A scathing report on Celsius from a court-appointed bankruptcy examiner was released on Jan. 31 and found many shortcomings in company practices. Shoba Pillay, a former federal prosecutor said customer deception was present since the found of Celsius,
“Celsius promoted itself as an altruistic organization. Behind the scenes, Celsius conducted its business in a starkly different manner than how it marketed itself to its customers in every key respect.”
In the report by Pillay, she implied Tether (USDT) was a borrower of Celsius. The CTO of the crypto industry’s largest stablecoin, Paolo Ardoino, denied these allegations.
On Jan. 18, the US Department of Justice shuttered Russian exchange, Bitzlato and the initial announcement from the DOJ suggested that strong actions would be taken against the crypto sector, but the message was not specific.
On Jan. 30, the top centralized exchange (CEX) by volume, Binance, decided to block some accounts due to the investigation into Bitzlato. While Binance says “funds are safe”, FinCEN listed Binance as among the top Bitcoin counterparties of Bitzlato.
While the UK Treasury published a crypto framework paper on Feb. 1, the debate of the framework will not close until April 30, 2023. Without a working framework for crypto sector regulation, different countries and states have a plethora of conflicting policies on how cryptocurrencies are classified as assets and precisely what constitutes a legal payment system.
The lack of clarity on this matter weighs on growth and innovation within the sector, and many analysts believe that the mainstreaming of cryptocurrencies cannot happen until a more universally agreed upon set of laws is enacted.
While the Commodity Futures Trading Commission (CFTC) has called for clearer regulation, the pace of these changes is unknown. The Biden Administration released a roadmap for cryptocurrencies which suggests preventing pension funds from investing into high risk investments.
Risk assets are heavily impacted by investor sentiment, and this trend extends to Bitcoin and altcoins. To date, the threat of unfriendly cryptocurrency regulation or, in the worst case, an outright ban continues to impact crypto prices on a nearly monthly basis.
Regulators have recently turned their eyes to Gemini and Digital Currency Group over the Earn program which can further hinder the crypto market. The trial of former FTX CEO, Sam Bankman-Fried may also set a negative precedent against cryptocurrencies.
Traders book profits after Bitcoin’s stellar January performance
Bitcoin and the crypto market have witnessed a strong start to 2023, seeing 64% of BTC investors reach profitability as BTC price reached $24,000 on Jan. 29. Even struggling Bitcoin miners saw massive growth, with revenues rising by 50% to $23 million, signaling a recovery for the beleaguered industry.
While Bitcoin had the second-best January on record, the volatility caused by the FOMC may start a crypto price correction. With Bitcoin and Ether posting January gains of 43% and 32% respectively, some investors may begin locking in profits ahead of the U.S. tax season and before the FOMC announcement.
Ray Salmond, the head of markets at Cointelegraph, provided insight into Bitcoin price in relation to the FOMC:
“The price action seen in Bitcoin and the wider crypto market reflect traders’ anxiety over today’s FOMC and Fed Chair Powell’s upcoming presser. In previous instances we’ve seen the market rally in the days leading up to FOMC, then a bit of risk off maneuvering on the day of CPI and FOMC. If the CPI report or rate hike decision aligns with the expectations of market participants, we’ve seen an extension of the bullish momentum, but in this scenario, traders will listen closely to Powell’s post-FOMC comments on how the Fed will combat inflation while also reducing the size of rate hikes and approaching its set terminal rate. The recent spate of layoffs in big tech and spun down earnings estimates from brokerages and analysts also raise concerns about the health of the economy.”
Related: Bitcoin on-chain data and BTC’s recent price rally point to a healthier ecosystem
Top crypto investors believe more sell-offs are on the horizon and Bitcoin analysts push warnings of the long-term downtrend continuing. There is a CME futures “gap” below $20,000, and some traders expect BTC price to retrace to this level at some point in the future.
In the meantime, investors’ appetite for risk is likely to remain muted, and potential crypto traders might consider waiting for signs that U.S. inflation has peaked, or for the Fed to signal that smaller-sized interest rate hikes are on the cards. A more transparent roadmap for crypto industry regulation would also help to improve sentiment across the sector.
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