Powell Time The past two weeks have been relatively calm as Bitcoin traded in the $16,000 to $17,500 range. It appeared that the contagion effects from the FTX collapse were slowly starting to fade, however in the past few days more information has surfaced surrounding Grayscale Bitcoin Trust (GBTC) and its potential insolvency.
On Wednesday GBTC closed down -7.42%, giving prospective buyers a record 43% discount on Bitcoin. Many are hypothesising that a large institutional investor is dumping shares of the ETF in order to patch a hole in their balance sheet and maintain solvency. After all, it has since been revealed that many institutional players, such as Grayscale’s parent company (Digital Currency Group), had significant exposure to FTX and its associated companies. You would assume that investors would flock to buy at these discounted levels, however Grayscale is currently being sued by hedge fund Fir Tree in order to investigate potential mismanagement and conflicts of interest. It’s likely that many investors will wait for the outcome of this litigation before making a definitive decision.
In other news, Jerome Powell, chair of the Federal Reserve (Fed), gave a speech on 30th of November where he detailed that a 50 bps rate hike was coming. Interestingly, this immediately caused a surge in risk assets and equities, the opposite from what macroeconomic theory would predict. This is likely due to markets reacting to the higher probability of a “pause” (a period where a central bank holds rates constant to assess if and how its policies are working) based on Powell indicating that future rate hikes might be less significant. However, it appears that the market overreacted to this news as the gain in equities following the speech has since been wiped out as the S&P500 has corrected to the levels it was at prior to the speech.
From a technical perspective, bears will be hoping for a break below the $15,500 support level which would likely bring new market lows not seen since 2020. This support has held since our last market update however it is yet to be retested. Additionally, since our last update where the MACD initially crossed its signal line, the short term upwards momentum played out and the histogram has remained bullish. Another important point to note is that the Money Flow Index (MFI) has been trending upwards since it bounced off oversold levels in early November. If this trend continues to play out and the oscillator moves towards 80, traders may look to exit long positions and start to look for short entries.
The two key events to watch in the coming weeks are the December 13th announcement on U.S CPI inflation and the Federal Reserve's December 14th announcement on rates. If inflation comes in soft, it’s likely that risk assets and equities markets will see at least a short term increase in bullish momentum. Inflation figures will likely dictate the Fed's decision on rates the following day and will determine if they stick to the 50 bps hike that Powell hinted at. These two events will have a major bearing on short run market direction. However, if GBTC continues to capitulate and the fund does indeed unwind, the short term future will be bleak for crypto.
