Layer 1s Lead Crypto Recovery But “Tricky” Macro Environment Raises Potentials for “Extreme and Violent” Moves


After the brutal last weekend, this new week is looking good as the crypto market experiences a bounce. As of writing, Bitcoin is trading well above $51,000 and Ether $4,400.

In the past 24 hours, the total crypto market cap has spiked over 10% to above $2.5 trillion. During this period, the biggest gainers have been SPELL (89%), BTT (67%), LRC (34%), MATIC (32%), and LINK (27%).

The deep decline during the latest sell-off was triggered by the weakness in the stock market, which is driven by weekend illiquidity, the possibility of an accelerated taper, Omicron fears, and inflation concerns.

“Crypto coins and tokens have been propelled higher in this era of ultra-cheap money, and as speculation swirls about just when central banks will start further tightening mass bond-buying programs and start raising interest rates, they are likely to continue to be highly volatile,” said Susannah Streeter, a market analyst at Hargreaves Lansdown.

According to QCP Capital, weakness in the Chinese stock market also has been in play as it noted that the funding rates on Chinese-dominated exchanges like OKEx, Huobi, and BYBIT “continue to be very negative in spite of the bounce in spot off the lows.”

The trigger for risk-off in China was Didi announcing the intention to delist from the NYSE earlier last week, raising concern that the China Securities Regulatory Commission (CSRC) was pushing Variable Interest Entities (VIE) to drop their listings in the U.S.

This week, in a move to boost its slowing economy, the People's Bank of China announced that it will lower the deposit reserve ratio of financial institutions by 0.5% points, meaning banks now have to hold less amount of money in reserves. This year's second such move would release 1.2 trillion yuan ($188 billion) in long-term liquidity.

This global traditional market weakness intensified in crypto due to liquidations. As we reported, the price crash and the wipe out of leverage from the market saw a good drop in open interest as well.

“Leveraged longs took a senseless beating over the last week, and it was perhaps overdue,” noted Delphi Digital.

The market was excessively leveraged long while the price was stuck with no spot buying to prop it up. “When there’s nobody left to buy/long, price momentum to the upside is severely limited,” it added.

Now, funding rates have reset, going negative and sentiments turning to extreme fear, which is expected after such an ordeal.

While this reset is positive for the market, QCP Capital expects “a tricky macro environment going forward. This increases the potential for extreme and violent moves like the one we just saw.”

Bitwise Asset Management CIO Matt Hougan is also of the same opinion as in an interview with Bloomberg; when asked whether we are going to have a bigger crash early next year, he said it depends on the outlook for inflation and how aggressive the Fed is.

“I think most of the elements behind the crypto market right now are very bullish. But if we see more aggressive wording from the Fed, more aggressive tapering, you could see Bitcoin sell off. Long term though, I still think there's an institutional relentless bid for crypto assets, Ethereum in particular. But Bitcoin as well,” he added.

But given the rebound we have seen, Hougan is “very bullish” on this particular dip regarding where we're going, particularly in Ethereum and other layer one solutions such as Solana, Polygon, and others.

As for price prediction, Hougan sees Bitcoin hitting $100,000 in 2022 but is “not so sure” for this year.

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