Sophia’s Thoughts On a Volatile Winter
The crypto market has been increasingly volatile these past couple of months. What’s caused this and what lies ahead?
These are Sophia's Thoughts:
Bitcoin and major altcoins faced sharp sell-offs, with Bitcoin dipping below $90,000 before recovering, as broader markets and sentiment reflected heightened uncertainty.
Stronger-than-expected job data and rising Treasury yields spooked investors, reducing the likelihood of further rate cuts and pressuring risk assets like Bitcoin.
Upcoming inflation data and retail sales figures will shape market sentiment, but with the Fed signaling a pause on rate changes, volatility remains a key driver.
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🚀 Last week’s market performance
The crypto market continued its multi-week sell off, shedding an additional 9.2% this week. Bitcoin (BTC) moved with the market, falling 7.6%. The best performing coin of the week was XRP (XRP), which evaded the downward momentum and managed to post a 4.4% gain. The worst performing coin this week was THORChain (RUNE) which plummeted 34.9%.
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🤨 What happened?
The cryptocurrency market has faced a rough few weeks, with sharp sell-offs hitting Bitcoin and major altcoins. Bitcoin has been sliding steadily, dropping from its December peak of USD 108,000 to below USD 90,000 on Monday and briefly hitting USD 89,000 before recovering to close around USD 94,500. The broader market has echoed this, with our equally weighted benchmark index falling over 40% since its early December highs.
The S&P 500 is down over 4% from its December peaks, while the Nasdaq has dropped nearly 6%, reflecting heightened risk-off sentiment and increased volatility across financial markets. MicroStrategy (MSTR), the largest corporate Bitcoin holder, has also felt the pressure, with its stock price down 38% from its peaks. The downturn reflects a cautious market grappling with uncertainty as 2025 begins.
Market volatility has followed an interesting pattern over the past few months. It cooled significantly in September and October, dropping to lows around 12%. However, November marked a reversal, with volatility climbing back to 16.76%, and this heightened trend continued into December and January. We believe this increased volatility has played a significant role in the recent market downturn, as uncertainty often drives risk-averse behavior among investors. The unpredictability of price movements, catalyzed by different macroeconomic pressures and tapering market sentiment, has created an environment where sustained sell-offs have become more pronounced across the markets.
💱Why did the markets sell off?
The recent market’s reaction was driven by a “good news is bad news” scenario. Friday’s nonfarm payrolls report revealed that 256,000 jobs were added in December, far exceeding expectations of 153,000. While this underscored the strength of the labor market, it also stoked fears of a slower pace of Federal Reserve rate cuts. With unemployment ticking down to 4.1% and wages showing moderate growth, major investment banks like Goldman Sachs pushed their rate cut projections further out, while Bank of America suggested the Fed might pause its rate-cutting cycle entirely or even consider a rate hike.
Investor sentiment took a hit as the 10-year Treasury yield surged to its highest level since April, drawing capital away from risk-on assets like Bitcoin. Higher yields make traditional fixed-income securities more attractive, reducing the appeal of non-yielding assets such as cryptocurrencies. This dynamic was a key factor in Bitcoin’s drop below USD 90,000, before partially recovering into Monday’s market close.
Meanwhile, market sentiment has steadily ticked downward since mid-December. Coin sentiment, on the other hand, has been notably volatile. It surged from positive into very positive territory during the holiday period, before falling sharply back into the positive range. This volatility underscores the fragile state of confidence within the cryptocurrency market as macroeconomic pressures continue to mount.
Adding to market unease were reports of a federal judge allowing the U.S. government to sell 69,370 seized Bitcoins, worth approximately USD 6.5 billion. Although analysts believe the sale is likely to be conducted through auctions rather than exchanges, the potential influx of supply created additional uncertainty for Bitcoin investors.
Despite these headwinds, Bitcoin spot ETFs managed to attract net inflows for the week, signaling continued institutional interest. However, the broader market narrative which was dominated by rate hike fears and supply concerns, kept investor sentiment subdued and market conditions volatile.
✍️ What Lies Ahead?
The coming week will offer critical insights into the economy, with a trio of data releases likely to shape market sentiment. On Tuesday, the December Producer Price Index (PPI) data revealed a modest 0.2% rise, slightly below expectations, signaling some stabilization in wholesale inflation. While energy prices surged, core goods prices (excluding food and energy) remained flat which suggests a cooling trend in producer costs. However, economists caution that these numbers may not extend to Wednesday’s Consumer Price Index (CPI) release, where a 0.3% monthly rise is anticipated. Any surprises could impact markets, particularly as the Federal Reserve weighs its next rate cut decision moves.
On Thursday, the December Retail Sales report will be released and will offer a glimpse into consumer spending during the holiday season. Strong data could suggest resilience in the economy but might further support the Fed’s case for keeping rates steady or even increasing them as Bank of America posits. Meanwhile, earnings season begins in earnest this week, with financial and tech giants posting numbers that may sway both equities and crypto markets.
While these data points are crucial, we believe that they are unlikely to significantly shift the Fed’s near-term strategy. Policymakers have signaled a pause in rate cuts, with the focus on maintaining stability amid ongoing inflationary and geopolitical pressures. For crypto markets, the upcoming days will test Bitcoin’s ability to hold its ground above the USD 90,000 range amid a balance of economic optimism and tighter financial conditions.
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