Crypto in the Eye of the Hurricane / Commentary on the Outlook for Digital Assets by Alex Wehnert.

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Frankfurt/M. (ots)

The crypto market has slipped into a peaceful Christmas sleep after a stormy advent. Investors in the segment, which is indeed characterized by high volatility, are currently holding back. In the week before Christmas Eve, the price of the leading digital currency Bitcoin remained in a small range between 16,400 and almost 17,000 dollars. But much suggests that digital assets are currently only in the eye of the hurricane.

The collapse of the FTX crypto exchange continues to send shock waves through the market. The broker Genesis is in trouble, the lender BlockFi, which promises investors returns on the lending of cyber currencies, had to file for bankruptcy – and last week one of the largest listed crypto companies, the mining giant Core Scientific, fled for bankruptcy protection.

Miners under pressure

For the company, falling crypto prices and rising energy costs make for a devastating combination. Because Bitcoin mining is tied to the enormously power-intensive proof-of-work consensus mechanism. According to the Bloomberg Intelligence analysts, several other prospectors are also coming under pressure in the current environment, selling both their equipment and their Bitcoin reserves at a record pace.

In fact, the mining difficulty, a measure of the computing power used to mine new Bitcoin, has fallen more than it has in almost a year and a half, which also points to miners’ liquidity problems. However, analysts believe that the miners have now liquidated such large amounts of Bitcoin that the sell-off wave is coming to an end. In the past, such developments were repeatedly followed by price increases.

Data from the futures market is also used by observers as indications of a reversal. According to CFTC Commitments of Traders reports, hedge funds’ net positions in Bitcoin futures on the Chicago Mercantile Exchange have climbed out of deep negative territory and are approaching neutral levels. Thus, the predominance of short versus long positions has declined – a trend that has continued during the turmoil following the FTX crash. However, asset managers’ net positions have fallen less sharply than hedge funds’ have increased, in December there is even a small increase of $140 million for asset managers in the middle of the month.

On the one hand, the development in the net positions can be interpreted as a sign that a bottom has now been reached after the Bitcoin price falls since the end of March. On the other hand, investors should note that the increases in hedge funds are less due to managers taking large long positions – and more due to the fact that open interest in Bitcoin has fallen significantly since the spring.

This should give crypto enthusiasts pause for thought, as open interest is a key indicator of institutional adoption. So the decline in open futures positions suggests that the narrative that established financial institutions make decisions with a long-term focus and therefore are not deterred by short-term market turbulence is not working.

The latest developments in the FTX case are unlikely to help boost confidence in digital assets. Sam Bankman-Fried, the founder of the trading platform, is free on $250 million bail after being arrested in the Bahamas and extradited to the United States. Caroline Ellison, chief executive of Bankman-Fried’s trading firm Alameda, and Gary Wang, former chief technology officer of FTX, have both pleaded guilty to charges of criminal misconduct. At the same time, investors are waiting to see which other victims of the crash will show up – the hurricane should soon continue to rage unabated.

(Börsen-Zeitung, December 24, 2022)

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