Cryptocurrency markets return to normalcy

Over the past few months, the cryptocurrency market has been fairly quiet. Bitcoin has been hovering around $20,000 for quite some time, as it moved forward in anticipation of changing general macroeconomic conditions.

At the end of October I wrote that we should be cautious about this price development, and that Bitcoin could be looking at an aggressively wicked bearish event. What I did not rule out was that this event would shake the cryptocurrency world to its bones, as one of the blue chip companies in the space, FTX, inexplicably fell into insolvency.

Obviously, this shook the markets. Last week I assessed how fierce the flow of Bitcoins out of the exchanges was, as people’s trust in these central entities to store their coins was, naturally, at historic lows.

In fact, yesterday I saw that 200,000 Bitcoins had flowed out of the exchanges since the FTX implosion. But now the data suggests that the market is calming down a bit. And again, it looks like we’ll go into crab mode until the macroeconomics kick in one way or another, or until an unexpected crypto-specific development emerges.

The first way to show that the dust is starting to settle is to look at the volatility of Bitcoin. Obviously, this spiked when Sam Bankman-Fried’s “games” were revealed to the public. However, after holding at high levels for the past few weeks, it has fallen back to more normal levels in recent days.

Another way to look at it is the decline in large trades. These trades (defined as greater than $100,000) spiked in the few days following the bust, but have since gradually declined, returning to the same levels we have seen for much of 2022.

Another useful measure to keep in mind is the net profit or loss made on the coins moved. It spikes in times of crisis, when the price drops sharply, before generally returning to the $0 mark when markets calm down.

The chart below shows this clearly: trading on November 9 led to a terrible loss of $2 billion, before November 18 topped it with a loss of $4.3 billion. This figure is lower than the worst record after Celsius ($4.2 billion loss) and Luna ($2.5 billion loss).

This reflects continued downward pressure on the Bitcoin price, but the trend has rebounded to near zero again.

FTX was a central part of the ecosystem, and its failure naturally shook the market. As I wrote recently, this contagion is not over.

However, last week’s data suggests that normalcy is returning to the cryptocurrency markets. Going forward, it may continue to tread water for a while. With China opening up post-containment, the latest inflation figures looming and the EU ban on Russian crude imports, the macroeconomy certainly has a lot to do.

Cryptocurrency investors will just have to hope that cryptocurrency scandals are out of the way for now.