The current market scenario is complex, as we have commented on several occasions, and it is that what we have been saying for a long time has been fulfilled. It was evident that we could not get out of the monetary policy that was being developed in any other way.
There was no room for manoeuvre, and a de-escalation in liquidity levels could not be faced without directly affecting the economy. We obviously did not count on this added factor of uncertainty in the form of a pandemic and armed conflict that have aggravated the situation
So now, the central banks have a major challenge, which is to reduce that liquidity that has ended up causing inflation and that has also run amok due to high energy prices, as a result of a war and a crisis of supply derived from a pandemic
Impact of monetary policy on crypto assets
Perhaps some reader thinks that all this we are telling has nothing to do with the cryptographic ecosystem. Cryptocurrencies in their origin, and more specifically bitcoin, are conceived as an alternative payment system without intermediaries, and since their supply is defined and controlled, they are unrelated to the interventions of organizations in the form of changes in monetary policy.
So far the theory… sounds great, right?
But let’s practice…
And what practice tells us is
The decisions of the FED are having a DIRECT and IMMEDIATE impact on the evolution of bitcoin
The graph shows perfectly the changes of direction and movements produced in bitcoin on the days when there is a monetary policy meeting of the Federal Reserve
Ethereum, and the end of the ‘Merge effect’
On the other hand, we have Ethereum that has passed its most important milestone: the Merge or PoW vs PoS migration process. The most widespread hypothesis was that the movement we had seen in ETH in the last month, which was more positive than in bitcoin, was due to the optimism generated by the next ETH update.
…and a Merge process afterwards, followed by a fork driven by miners who want to continue holding the PoW, the truth is that the Ethereum chart shows a manifest weakness once the PoS is active after September 15
DeFi system mimics ETH
If we extend this verification we can easily see that it is the entire ecosystem related to ETH that has suffered this correction, although in a more moderate way, with ETH being the most affected
This adds one more variable of uncertainty and makes the scenario more complicated. There have been no problems or errors derived from the move to PoS, but it seems that investors had discounted this news and have made capital gains these days
Upward trend of activity in the crypto market
And all this, within a framework of increased activity and volume across the board. We can see it above all in two specific data:
- Capital turnover, that is, the relationship between the volume traded on the market and its capitalization in 24 hours. Visualized with our VolMCAP indicator
- The volume traded in the market, which we can analyze through our Crypto500 index
The trend of increasing volume in the market is clear enough. Now we will see where this movement leads us
Are we in a cycle change?
We did not want to close today’s post without asking this question, because I think it is very important, and today we have no answer. But… back to the facts
And what reality tells us is that the model followed by most bitcoin analysts, the so-called Stock-to-Flow, could be in danger, given that the movement we are experiencing would have a deeper fall than expected.
Perhaps the deflationary policy will not be enough to maintain the bullish dynamic?
And I think the answer to this question lies in the demand. The demand for the asset has fallen due to the drop in price, but largely due to the situation in other markets. And here we close the circle returning to the scenario of inflation and monetary policy
The cryptoactive ecosystem had never encountered a similar market context, of liquidity contraction
I believe that the way in which the crypto asset market and its investors adapt to this new context will determine the immediate future of digital assets.
DYOR