Santa Rally Cut Short By Hawkish Federal Reserve

Investor sentiment was crushed by the Federal Reserve last week as warnings were shared that interest rate hikes would likely continue into 2023.

Although CPI results indicated that inflation had cooled for the fifth consecutive month, positive sentiment was stripped by signals that interest rates would unlikely fall before 2024.

The recent uncertain and fearful market has resulted in Bitcoin experiencing an extremely quiet December and current prices have forced Bitcoin miners into capitulation. 

• Stocks drag cryptos lower as Fed signals more pain for 2023
• Bitcoin trading volume decreases as volatility hits multi-year lows
• Bitcoin miners tackle lower prices as mining difficulty set to increase

Stocks drag cryptos lower as Fed signals more pain for 2023

Stocks and cryptos moved lower in tandem last week as the US Central Bank warned of further hawkish policies heading into 2023. 

Although Bitcoin reached a 5-week high of $18,300 on Tuesday as November CPI results showed inflation had cooled for the fifth consecutive month, bullish price action was shortlived.

Momentum was stunted by Wednesday’s FOMC meeting, when investors were spooked by signals that more interest rate pain is to come.

Although the Federal Reserve implemented an expected 0.5% interest rate hike for December, the Fed Chair, Jerome Powell, shared further insight that interest rate hikes would continue throughout the entirety of 2023. He also stated that it they would unlikely be reduced until 2024.

With the latest December interest rate hike, the Federal Funds Rate is now the highest it has been in 15 years

At the post-meeting news conference, Powell said, “Inflation data received so far for October and November show a welcome reduction in the monthly pace of price increases. But it will take substantially more evidence to have confidence that inflation is on a sustained downward path.”

Although many were hoping interest rate hikes to cease or even reverse in 2023, the Fed’s renewed warnings stripped confidence that liquidity might return to risk-on markets.

The stock market indices of the Dow Jones, S&P 500, and Nasdaq slipped 1.9%, 2.2%, and 2.7% respectively.

While sentiment from the Fed also forced cryptos lower, the Bitcoin lows from November were not breached. 

United States Federal Funds Rate

Bitcoin trading volume decreases as volatility hits multi-year low

After an incredibly chaotic year, December has brought relative quiet to the world’s leading cryptocurrency market.

According to a report from on-chain intelligence provider, Glassnode, Bitcoin’s trading volume has reduced to levels not seen since January 2021. In particular, trading volume within Bitcoin’s futures market have fallen to mutli-year lows and are now comparable with Ethereum. 

BTC and ETH futures trading volume.

Accompanying the drop in trading volume for December is a drop in realized volatility, which defines how much the price of Bitcoin moves within a set period. As a volatile asset class, the price of Bitcoin usually moves up and down frequently. However, that volatility has reduced to lows not seen since October 2020.

Unusually, futures and perpetual markets have also moved into a state of backwardation; a rare phenomenon where spot price trade above futures price. 

Typically the market is in contango where futures price trade above spot price due to the time borrowed element associated with futures contracts. However, this can reverse at times of increased hedging and short selling with the expectation of lower prices.

According to the Glassnode, these effects are all indicators that investors are reducing position sizes and delveregaing to account for uncertainty regarding wider macroeconomic policies and the fear unleashed from the collapse of FTX in November 2022. 

Bitcoin’s annualized realized volatility

Bitcoin miners tackle low prices as mining difficulty set to increase

The difficulty of Bitcoin mining is set to increase on Dec. 19 after falling for the longest period in the last 18 months.

According to estimates from BTC.com the next mining adjustment could see an increase of 3.78%.

Bitcoin mining difficult chart.

This comes at a time when miners are battling falling Bitcoin prices which is resulting in profits being squeezed. Many are now concerned that miners may begin to pull out of the network en masse until prices begin to consistently rise once more. 

According to a Hash Ribbon indicator, which uses two moving averages of hash rate to indicate periods of miner capitulation and recovery, mining conditions are becoming unstable.

The 30-day moving average for hashrate dropped below the 60-day moving average in early December and has continued to fall lower; a signal that is typical of miner capitulation. 

This means mining rigs are beginning to be turned off due to challenging market conditions, which is resulting in a fall in hash rate. 

However, according to LookIntoBitcoin, the provider of the Hash Ribbon chart, these times are also associated with favourable periods of Bitcoin accumulation. 

Hash Ribbon Indicator that depicts the 30-day and 60-day hash rate average.

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