Bear Pain

Crypto Market Week in Review (20 January 2023)


This week the markets turned into a risk-off mode. Stocks dropped and bonds advanced, reflecting unexpectedly weak US retail sales data. After the recent two-week rally, stocks have priced in less tight monetary policy and started focusing on worse earnings prospects due to a deteriorating economy. Bad economic news affects earnings, even if it makes the Federal Reserve less hawkish.

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The major news of the week was the Bank of Japan monetary policy meeting. The surprise tightening at the previous meeting marked a start of a bigger policy turnaround, making further actions of the bank unusually important for the global market. Decades of an ultra-easy monetary stance have turned Japanese funds into big investors in the global market since domestic assets had near-zero yields. If there is a pivot to normal domestic rates, the global market may suffer due to Japanese investors’ outflows back home. The Bank of Japan dismissed prospects of further tightening at this meeting, but traders took that as just a delay. The forex market reaction was particularly demonstrative, as the Japanese yen rallied and then fell back on the news from the meeting. We think that prospects of Japan's policy turnaround may become a major market-moving factor in the second quarter.

7-day Performance of Japanese Yen (USD/JPY)

Source: TradingView

Cryptocurrencies continued rising. Bitcoin advanced by 5% since the last Friday, with Ethereum up by 6%. Monero was a rare loser among cryptocurrencies, declining by 5% after another anonymous coin (BEAM) was delisted by Binance.

The crypto rally since the year-end has become too painful for bears, leading to a large liquidation of futures short positions. Last Saturday shorts worth $141 million were closed. It looks like a mirror image of long liquidation in early November (due to the FTX collapse).

Bitcoin Futures Liquidations

Source: The Block

Large liquidations of shorts waked up the volatility market, increasing the implied volatility of both Bitcoin and Ethereum. Bitcoin DVOL index rallied and the volatility curve inverted during the last weekend. After the weekend, the DVOL index trended lower and the volatility curve turned flat.

Bitcoin DVOL Index

Source: Deribit

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