Crypto Winter: Are We Really in Front of a Bear Market?

Warnings of an imminent bear market hit the cryptocurrency markets. Crypto analysts told investors to prepare for an extremely cold 'crypto winter' following Terra Luna collapse. Are the bearish warnings justified or fictionized?

Filled with ulterior motives and conflicting views, we will attempt to assess whether Bitcoin is poised for further selling or perhaps the downtrend is coming to an end.

source: tradingview

The bearish predictions for Bitcoin had repercussions. Some crypto exchanges have taken measures to prepare for the crypto winter.

Gemini and Coinbase Halt Recruitments

Gemini Trust Co., a popular crypto exchange owned by 2 brothers (twins), Tyler and Cameron Winklevoss announced the company will cut 10% of its workforce:

"We are now, in the contraction phase that is settling into a period of stasis, what our industry refers to as 'crypto winter'. This has all been compounded by the current macroeconomic and geopolitical turmoil. We are not alone.

"To that end, we have asked team leaders to ensure that they are focused only on products that are critical to our mission and assess whether their teams are right-sized for the current turbulent market conditions that are likely to persist for some time.

"After much thought and consideration, we have made the difficult but necessary decision to part ways with approximately 10% of our workforce."

Gemini Official Statement

Coinbase initially slowed the pace of hiring new employees but then announced it is pausing hiring "for both new and backfill roles for the foreseeable future."

"In response to the current market conditions and ongoing business prioritization efforts, we will extend our hiring pause for both new and backfill roles for the foreseeable future and rescind a number of accepted offers.

"Two weeks ago, we paused hiring while we took time to reprioritize our hiring needs against our highest-priority business goals. As these discussions have evolved, it’s become evident that we need to take more stringent measures to slow our headcount growth.

"Adapting quickly and acting now will help us to successfully navigate this macro environment and emerge even stronger, enabling further healthy growth and innovation."

Coinbase Official Statement

Bitcoin Miners Began Selling BTC

Bitcoin miners that have been accumulating Bitcoin rewards are becoming increasingly concerned. Bitcoin's current levels are adding pressure on the crypto miners to liquidate their holdings to cover future operative costs.

source: hashrate index

The crypto mining stock index has a 0.97 correlation to BTC price. Due to the fairly rapid decline in Bitcoin, some miners have already begun liquidating.

Cathedra, a Canadian mining firm revealed in its earnings report that it has sold almost all of its Bitcoin holdings. 235 bitcoins were sold throughout may at an average price of $29,152 for over $5 million:

"Throughout May 2022, the Company sold 235 bitcoin at an average price of $37,315 (US$29,152) for total cash proceeds of $8,768,922. With these sales, the Company insulates itself from additional declines in the price of bitcoin and maintains its liquidity position.

"Cathedra will continue pursuing its long-term goal of accumulating a large bitcoin treasury through its mining operations. As of May 27, 2022, the Company held $2,559,236 in cash and $133,468 of bitcoin (3.69 BTC) for a total of $2,692,704 in cash and bitcoin."

Cathedra's Chief Executive Officer, AJ Scalia commented the following on the BTC liquidations: "We have spent the last several weeks restructuring our balance sheet and operations to ensure Cathedra is well-positioned to endure a prolonged economic downturn."

“Some of these decisions were difficult, but we are confident they are in the long-term best interest of shareholders and the Company.”

Catherdra Official Statement

BTC flow from miners to exchanges spiked in May as seen from the chart below.

source: cryptoquant

Over 2,000 BTC were liquidated on 12 May according to cryptoquant which is tracking over 15 miners. According to Bloomberg, crypto miners transferred 195,663 coins to exchanges in May 2022. It is the largest monthly increase since January.

The estimated value of the cryptocurrencies that were transferred is $6.3 billion. It is important to note that miners may transfer coins to exchanges for other purposes rather than selling.

Riot Blockchain mining company also liquidated bitcoin in May 2022. The firm reported that out of the 466 BTC it has earned in May, 250 BTC were sold for approximately $7.5 million.

Riot Blockchain is holding around 6,536 BTC as of 31 May.

Although there has been a negative downturn for bitcoin, Riot is in the process of constructing a new 1-gigawatt mining facility in Texas. According to the official statement, "The Expansion has begun with the development of an initial 400 megawatts ('MW') of capacity on a 265-acre site, with immersion-cooled mining and hosting operations expected to commence in July 2023."

Jason Les, the CEO of Riot said that: "Upon completion of the Expansion, Riot’s developed capacity will total 1.7 GW, establishing the Company among the largest Bitcoin mining operations globally."

The Fed Balance Sheet

The Federal Reserve (Fed) may begin reducing its balance sheet as early as June 2022. The impact of the monetary policy tightening is likely to affect multiple markets including cryptocurrencies.

The Fed's balance sheet currently stands at $8.9 trillion.

Focus will be on the 4 US treasury securities the Fed is holding that are maturing in June 2022, starting on 15 June.

15 June: $14.9 billion

30 June: $13.3 billion

30 June: $15.4 billion

30 June: $4.6 billion

Total: $48.5 billion

Rate hikes are expected to be made as the tightening begins. Fed Governor Christopher Waller said it is still unclear what impact will the balance sheet reduction have.

An Economic Hurricane Is Coming

The Federal Reserve is taking these measures to curb inflation, which is at its highest point in 4 decades.

JPMorgan Chief Executive, Jamie Dimon warned that an economic hurricane is coming:

“You know, I said there’s storm clouds but I’m going to change it … it’s a hurricane. Right now, it’s kind of sunny, things are doing fine, everyone thinks the Fed can handle this. That hurricane is right out there, down the road, coming our way.

“You’d better brace yourself, JPMorgan is bracing ourselves and we’re going to be very conservative with our balance sheet.”

“We’ve never had QT like this, so you’re looking at something you could be writing history books on for 50 years. Central banks don’t have a choice because there’s too much liquidity in the system.

"They have to remove some of the liquidity to stop the speculation, reduce home prices and stuff like that.”

The US inflation soared in recent months, which is forcing central banks to act.

source: BLS

source: BLS

The upcoming monetary tightening by the Federal Reserve may have a significant impact on Bitcoin and the leading cryptocurrencies.

Bitcoin May 'Lose Its Peg' to US Indices

BTC has been strongly correlated to the US Indices, such as S&P500 or Nasdaq100. The balance sheet reduction to curb inflation in tandem with rate hikes may cause Bitcoin to 'de-peg' from US markets.

While it is challenging to determine, I am not expecting a reversed correlation. Instead, Bitcoin demonstrates greater resilience in an event of a bearish stock market and benefits from moderate gains based on its own fundamentals, such as regulations, legal tender status etc.

The Fed monetary policy may inject greater volatility in Bitcoin in the short-term, in the medium to long term the price may be sustained by market bulls.

When central banks loosed their monetary policies due to the 2008 financial crisis the currency correlations were altered. Likewise, when Yellen began tightening the currency correlations were changed once again.

A similar phenomenon may occur with Bitcoin.

Reports that Citadel Securities, Fidelity Investments, and Charles Schab Corp are developing a crypto trading system for retail brokers may only strengthen the crypto markets.

Joined by Virtu Financial Inc, the financial firms' platform will offer brokers crypto executions to their clients. The ecosystem is still being developed and many are only available at the beginning of 2023.

Sequoia Capital and Paradigm may also join the project.

Crypto Algos Potential Impact

The abrupt shift in market conditions may be sufficient to achieve the above. While the Fed will strive to accelerate its balance sheet reduction, breaking out of the correlation may take some time.

The Fed monetary policy that is due next week (15 June) may mark the beginning of new market fundamentals for Bitcoin. As other cryptocurrencies and tokens often trade in tandem with Bitcoin, crypto trading algorithms' performance may be affected.

On most occasions when market conditions abruptly change, algorithms tend to post negative results.

$32,500 (approx.) may be the key daily resistance in BTCUSD. A firm daily close above may clear the way for further gains.