Sebastian Sinclair

As the fourth quarter gets underway, the intricate dance of monetary policy, evolving liquidity patterns and inherent market volatility is set to define the crypto market&#8217;s narrative in the coming months, analysts say.



A marked decrease in crypto volatility throughout the third quarter, as highlighted in Kaiko&#8217;s Quarterly Market <a href="https://research.kaiko.com/insights/breaking-down-q3s-top-5-trends">Report</a> last week, suggests the asset class may either be reaching maturity or experiencing dampened activity, it said.



Crypto volatility consistently decreased in the last quarter, reaching its lowest point in years by the end of September. A slide in volatility has persisted since mid-2022 following the downfall of several major industry players including Terra, Celsius and Three Arrows Capital.



According to the latest <a href="https://99bitcoins.com/bitcoin/historical-price/volatility/">Bitcoin Volatility Index</a> figures, the asset’s 30-day estimate has dropped to levels not seen since March 2019 to 0.57%. The index quantifies the daily variation in bitcoin&#8217;s price compared to its initial value.



As a result, bitcoin&#8217;s (<a href="https://blockworks.co/price/btc">BTC</a>) spot volume for the third quarter has declined to $6 billion, marking a consistent drop from $7 billion in Q2 and $13 billion in Q1.



Even the court’s decision regarding Grayscale at the end of August, which <a href="https://blockworks.co/news/grayscale-sec-decision-bitcoin-etf">mandates</a> the SEC to reevaluate Grayscale&#8217;s proposal and is thought to boost the chances of a <a href="https://blockworks.co/news/bitcoin-etf-race-news">BTC ETF</a> spot approval, has failed to lead to notable price shifts.



The market also appears to be moving towards a greater concentration of liquidity, Kaiko highlighted.



Data shows that Binance now accounts for 30.7% of global market depth and an astonishing 64.3% of the total trade volume. This comes into sharper focus when noting that the top eight crypto exchanges hold more than 90% of the market depth and 89.5% of the trading volume.



“Liquidity concentration is a natural phenomenon that ultimately benefits individual traders, giving them better prices for their orders,” Kaiko said in its report. “However, because crypto markets by nature emphasize decentralization, liquidity concentration, especially on centralized exchanges, is worrying.”



In light of the asset class’ centralized connection, Bloomberg analyst Mike McGlone said last week the Federal Reserve&#8217;s implicit influence over bitcoin has largely been due to its nature as a round-the-clock leading indicator within the wider financial landscape.&nbsp;



The observed liquidity redirection away from bitcoin suggests a potential correction ahead, McGlone said in a <a href="https://twitter.com/mikemcglone11/status/1709134080233668900/photo/1">social media post</a>.



&#8220;The bottom line for bitcoin at the start of 4Q may be that liquidity remains negative, with price implications,&#8221; McGlone posted. &#8220;Coming of age in a zero interest-rate world, the crypto hangover could be enduring as global rates continue to rise.&#8221;



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Get the news in your inbox. Explore Blockworks newsletters:



<ul class="wp-block-list">
<li><a href="https://blockworks.co/newsletter/thebreakdown">The Breakdown</a>: Decoding crypto and the markets. Daily.</li>



<li><a href="https://blockworks.co/newsletter/empire">Empire</a>: Crypto news and analysis to start your day.</li>



<li><a href="https://blockworks.co/newsletter/forwardguidance">Forward Guidance</a>: The intersection of crypto, macro and policy.</li>



<li><a href="https://blockworks.co/newsletter/0xresearch">0xResearch</a>: Alpha directly in your inbox.</li>



<li><a href="https://blockworks.co/newsletter/lightspeed">Lightspeed</a>: All things Solana.</li>



<li><a href="https://blockworks.co/newsletter/thedrop">The Drop</a>: Apps, games, memes and more.</li>



<li><a href="https://blockworks.co/newsletter/supplyshock">Supply Shock</a>: Bitcoin, bitcoin, bitcoin.</li>
</ul>

Bitcoin

Bitcoin liquidity, increased market volatility pose headwinds

Ben Strack

<div id="highlights-block_61b3cc207a750" class="highlights">
 <ul>
 <li>“The US government is not going to be dumb enough to mess up something this good for the country,” Mike McGlone, senior commodity strategist for Bloomberg Intelligence, said about crypto regulation</li>
 <li>ARK36 Executive Director Loukas Lagoudis said he expects Ethereum to continue gaining ground against bitcoin in the medium-term</li>
 </ul>
 
</div>



The US government will likely recognize the opportunity that crypto offers for the country and regulate it properly, a Bloomberg Intelligence strategist said, noting that the most significant regulation that the industry can expect could be around stablecoins.&nbsp;&nbsp;



“Increasing dollar dominance through digital tokens, jobs, votes, plenty of revenue (tax) and risks of falling behind are the top reasons we expect the US will embrace crypto assets with proper regulation,” Mike McGlone, senior commodity strategist for Bloomberg Intelligence, said in a research note published on Friday.&nbsp;



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">McGlone refers to stablecoins — coins pegged to the US dollar, such as Tether (USDT) — as crypto dollars. Though he told Blockworks he is unsure exactly how the US will choose to regulate stablecoins, he expects them to properly incorporate them into the US financial system.</blockquote>



<a href="https://bitfury.com" target="_blank" rel="noreferrer noopener">Bitfury</a> CEO Brian Brooks testified <a href="https://cms.blockworks.co/crypto-industry-will-move-offshore-if-congress-doesnt-act-executives-warn/" target="_blank" rel="noreferrer noopener">during a hearing</a> of the House Committee on Financial Services on Wednesday that the US’s regulatory decisions around crypto could drive businesses offshore, affecting the country’s competitiveness in the technology and capital markets sectors.



He noted that crypto exchanges and stablecoin issuers, for example, can receive [electronic] money licenses to access the payment system in the United Kingdom, but are not able to in the US.&nbsp;



“Is it consistent to take the position that only banks should be allowed to issue stablecoins, but then fail to grant bank charters to the largest issuers of stablecoins?” Brooks argued. “That would after all bring stablecoin activity within the ambit of an existing national bank supervision system of which we’re all familiar.”&nbsp;



The largest stablecoin, USDT, had a market capitalization of $78 billion, as of 2 pm ET on Friday, according to CoinGecko.&nbsp;



A 2021 trend that McGlone expects to accelerate in 2022 is the proliferation of stablecoins, he said in a Dec. 6 research note, adding that the segment’s market capitalization could rise to more than $130 billion.



Stablecoins, alongside bitcoin and ethereum, will maintain dominance in the crypto space, he added. Ethereum has been advancing as a percentage of the total crypto market, to about 20% from roughly 10% a year ago, McGlone said, noting that most stablecoins operate on the Ethereum platform.



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">“Speculation and things like Shiba Inu, you’re going to expect that, but this … technology and what Ethereum does for crypto dollars and NFTs is here to stay,” McGlone told Blockworks. “The US government is not going to be dumb enough to mess up something this good for the country.”</blockquote>



McGlone said he also expects more regulatory clarity around crypto ETFs next year, noting that an Ethereum futures-based offering will likely hit the US market. He described <a href="https://cms.blockworks.co/when-will-the-sec-approve-a-spot-bitcoin-etf/" target="_blank" rel="noreferrer noopener">spot bitcoin ETFs</a>, as well as ETFs that would physically invest in the crypto market more broadly, as “the end game,” noting that those types of products will come in “a matter of time.” 



For now though, issuers are launching physically backed crypto ETFs outside the US.&nbsp;



“Can anyone explain…why physically settled crypto ETFs are safe and legal in Germany, Brazil, Singapore, and elsewhere, but somehow not in the United States?” Brooks said during the Wednesday hearing.



A subsidiary of financial services goliath Fidelity Investments <a href="https://cms.blockworks.co/fidelity-set-to-launch-spot-bitcoin-etf-in-canada/" target="_blank" rel="noreferrer noopener">launched a spot bitcoin ETF</a> on the Toronto Stock Exchange in Canada earlier this month.



<h3 class="wp-block-heading">Bullish on price action</h3>



Bitcoin was priced at about $47,740, as of 2 p.m. ET, according to CoinGecko &#8211; down 15.5% from seven days ago. Ethereum’s price was at roughly $3,980 at that time, the data shows, down 12% over the past week.



Though the current “choppy” price action has introduced uncertainty to the digital asset market, <a href="https://urldefense.proofpoint.com/v2/url?u=https-3A__ark36.com_about-2Dus_-23our-5Fteam&amp;d=DwMF-g&amp;c=sWW_bEwW_mLyN3Kx2v57Q8e-CRbmiT9yOhqES_g_wVY&amp;r=FUTyxn_53i67ILzDMW5BFG24i77vq3UgLHm1MQBAppk&amp;m=F2xft-K7lbChauYoIcnSMDrgQHVZWAilDTCEYvi8Lnk&amp;s=4TvW1zxaA07sth7ycoEiAHuILYioqhRAnu0CpSFeqrU&amp;e=" target="_blank" rel="noreferrer noopener">ARK36</a> Executive Director Loukas Lagoudis said in an email, the crypto hedge fund believes the sustained adoption of digital assets by institutional investors and their further integration into the legacy financial systems will be the main drivers of growth of the crypto space in the next year.



“Over the past 12 months, we have seen institutions signal a change in their preferences and start favoring digital assets over gold as a reserve asset,” Lagoudis said. “We fully expect this trend to continue.”



Compared with broad equities, which have not had a 10% correction since last year, the crypto market may have a relative advantage in 2022, McGlone said previously in the Dec. 6 note. The Bloomberg Galaxy Crypto Index (BGCI) increased about 1,200% since the end of 2019 compared to a roughly 90% gain for the S&amp;P 500.



Lagoudis predicts that investors will see allocation to digital assets as a part of their risk management strategy, especially due to the increasingly inflationary economic environment and declining bond yields.



“We also expect that Ethereum will continue to gain ground against bitcoin, at least in the medium term, as its importance for institutional investors will continue to grow,” the ARK36 executive added.



Bitcoin appears to be on a trajectory for $100,000 due in part to its increasing demand and decreasing supply, McGlone said in a research note.&nbsp;



“The about 50% drawdown in 2Q should help firm the foundation, and we see greater potential for bitcoin to head toward $100,000 than sustain below $50,000,” he said.



Meanwhile, Ethereum enters 2022 with rising adoption and declining supply and also withstood a substantial correction this year.



“The correction helped establish $4,000 as key resistance and $2,000 as support; what was resistance is now support, and $4,000 may act as the key pivot for 2022,” McGlone wrote. “The primary denominator for non-fungible tokens and go-to platform token for crypto dollars, Ethereum has established its usefulness in 2021 and we see 2022 building on that.”

2022

What Can the Crypto Industry Expect in 2022?

Jacquelyn Melinek

<div id="highlights-block_612fc2856e488" class="highlights">
 <ul>
 <li>After attending Blockworks’ Bretton Woods: The Realignment conference, McGlone said that crypto assets are enhancing the value of the dollar through stablecoins like Tether.</li>
 <li>“The performance of ether is up almost 400% and if you overlay that with bitcoin, bitcoin would be about $140,000,” he said</li>
 </ul>
 
</div>



The world is going to transact digitally with the dollar — it’s just a matter of time, said Mike McGlone, senior commodity strategist at Bloomberg Intelligence.



Tether, also known as USDT (which stands for US dollar tether), is a stablecoin that aims to give traders a way to on-ramp and off-ramp crypto to dollars, so they have a safe harbor from volatility. In theory, stablecoins like Tether are backed by an equal amount of fiat currencies giving at 1:1 ratio <a href="https://www.coindesk.com/markets/2021/05/13/tethers-first-reserve-breakdown-shows-token-49-backed-by-unspecified-commercial-paper/">though in reality </a>that’s not always the case. Tether, and other dollar-denominated stablecoins, are often used by investors who want to avoid the volatility of other cryptocurrencies while still keeping value within the crypto markets.&nbsp;



“The world is going to trade in the dollar digitally, it&#8217;s just a matter of time. It’s about time for the US government to regulate it and then we will be crushing China,” McGlone said during the first Bloomberg Crypto Research Event on Wednesday.



The most widely traded crypto-asset is USD, and “there isn’t not one kind of any other currency on the planet even close to the volume traded organically and digitally on blockchains on something like this, it’s completely dollar-dominated and it shows what’s happening globally in the world,” McGlone said. When measuring the USD versus other currencies, there isn’t a better one, and “I think this is something that needs to be pointed out,” he added. 



<div class="wp-block-image"><figure class="aligncenter size-full"><img loading="lazy" decoding="async" width="512" height="225" src="https://blockworks-co.imgix.net/wp-content/uploads/2021/09/coinmarketcap-sep-1.jpg" alt="" class="wp-image-7483" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2021/09/coinmarketcap-sep-1.jpg?w=512 512w, https://blockworks-co.imgix.net/wp-content/uploads/2021/09/coinmarketcap-sep-1.jpg?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2021/09/coinmarketcap-sep-1.jpg?w=428 428w, https://blockworks-co.imgix.net/wp-content/uploads/2021/09/coinmarketcap-sep-1.jpg?w=470 470w, https://blockworks-co.imgix.net/wp-content/uploads/2021/09/coinmarketcap-sep-1.jpg?w=389 389w, https://blockworks-co.imgix.net/wp-content/uploads/2021/09/coinmarketcap-sep-1.jpg?w=80 80w" sizes="auto, (max-width: 512px) 100vw, 512px" /><figcaption>Source: CoinMarketCap</figcaption></figure></div>



USDT has a market capitalization of over $65.62 billion, up 380.7% from $13.65 billion on the year-ago date. For reference, bitcoin’s market capitalization was $1.38 million on Wednesday, about 15% higher than $1.2 million on the year-ago date, according to CoinMarketCap <a href="https://coinmarketcap.com/currencies/tether/?period=7d">data</a>.&nbsp;



Since the launch of bitcoin, Tether has almost always gone up and coincided with an increase in value for the long-term view, McGlone said.&nbsp;



One of the top crypto trends McGlone said he’s watching is the digitalization of dollars. Bitcoin is well on its way to becoming the global digital reserve asset and after attending Blockworks’ Bretton Woods: The Realignment conference, McGlone said that crypto assets are enhancing the value of the dollar through stablecoins like Tether. “The most widely traded cryptos are digital versions of the dollar,” he wrote.&nbsp;



<h3 class="wp-block-heading">Ethereum to outpace bitcoin</h3>



Separately, McGlone keeps a close eye on Ethereum and has previously <a href="https://cms.blockworks.co/bloombergs-mike-mcglone-on-ethereum-trends-and-the-digitalization-of-finance/">said to Blockworks</a>, “Ethereum is basically the building block, it’s the go-to platform for the entire decentralization of finance.”&nbsp;



When Ethereum kicked in its new protocol change of EIP 1559, it reduced supply and has dropped the availability of the cryptocurrency to about less than 400 coins a day, which is a decent amount of supply constraints given the demand kicking higher due to NFTs McGlone said.&nbsp;



<div class="wp-block-image"><figure class="aligncenter size-full"><img loading="lazy" decoding="async" width="512" height="316" src="https://blockworks-co.imgix.net/wp-content/uploads/2021/09/bloomberg-eth-bitcoin-sept-1.jpg" alt="" class="wp-image-7484" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2021/09/bloomberg-eth-bitcoin-sept-1.jpg?w=512 512w, https://blockworks-co.imgix.net/wp-content/uploads/2021/09/bloomberg-eth-bitcoin-sept-1.jpg?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2021/09/bloomberg-eth-bitcoin-sept-1.jpg?w=416 416w, https://blockworks-co.imgix.net/wp-content/uploads/2021/09/bloomberg-eth-bitcoin-sept-1.jpg?w=423 423w, https://blockworks-co.imgix.net/wp-content/uploads/2021/09/bloomberg-eth-bitcoin-sept-1.jpg?w=355 355w, https://blockworks-co.imgix.net/wp-content/uploads/2021/09/bloomberg-eth-bitcoin-sept-1.jpg?w=80 80w" sizes="auto, (max-width: 512px) 100vw, 512px" /></figure></div>



Bloomberg Intelligence previously <a href="https://twitter.com/mikemcglone11/status/1424686739055067141">reported</a>, “If bitcoin were to catch up to ether&#8217;s performance this year, the No. 1 crypto&#8217;s price would approach $100,000. Though we see bitcoin on that path, there appears little can stop the process of Ethereum flippening.



“The performance of ether is up almost 400% and if you overlay that with bitcoin, bitcoin would be about $140,000,” McGlone said. “So I still expect bitcoin to get toward $100,000, the question is when, but right now it’s just a dog compared to what’s happening with Ethereum and DeFi,” he said.&nbsp;



Most NFTs are sold on Ethereum-based platforms, so to mint or trade one a user has to buy the ether, he added.&nbsp;



Riding the NFT wave, the largest NFT marketplace, OpenSea, hit $3 billion in monthly volume or 925,000 ETH during the month of August. In addition, the start-up has seen roughly 200,000 active wallets on its platform, Blockworks previously <a href="https://cms.blockworks.co/opensea-hits-3b-in-monthly-nft-volume/">reported</a>. According to NonFungible, NFT sales are valued at $1.6 billion for the month as of August 18, up from $900 million reported in the week prior.



“So there’s a demand push and supply constraint all happening at the same time and Ethereum is well below the high for the year which is about $4,500, to me that’s a matter of time to drag along bitcoin,” McGlone said. 



Want more investor-focused content on digital assets? <a target="_blank" href="https://cms.blockworks.co/events/digital-asset-summit-2021-2/" rel="noreferrer noopener">Join us</a> September 13th and 14th for the Digital Asset Summit (DAS) in NYC. Use code ARTICLE for $75 off your ticket. <a target="_blank" href="https://cms.blockworks.co/events/digital-asset-summit-2021-2/" rel="noreferrer noopener">Buy it now</a>.