Crypto Market Becomes More Sensitive: Weekly Review From Tokeninsight

• Under the impact of intensive macro information, the overall volatility of the crypto market remains high after the quarterly delivery. 
• Concerns about liquidity and regulation have significantly sensitized market sentiment, and mainstream crypto prices have undergone significant fluctuations. 
• The market's short-term confidence has risen significantly, but investors' mid- and long-term expectations for cryptos are still relatively stable, and concerns about liquidity trends and supervision are still relatively prominent in the market, which may affect future market performance expectations.
  

The Volatility Continues, and so Does the Worry

The theme of the crypto market this week is "volatility". Before and after the quarterly delivery of derivatives, due to the impact of regulatory news, market volatility did not fall as expected. It continued to be at a high level this week, and even rose slightly as the prices of mainstream cryptos fell. The price change of BTC reached around $7000 this week, while the price change of ETH exceeded $500.

It is worth noting that market investors' valuations of BTC and ETH have diverged quite a bit this week. The difference between historical volatility and implied volatility is one of the indicators for peeking into investors' thinking. A positive volatility difference indicates that the market is biased towards overheating, and a negative volatility difference indicates that the market is undervalued. Since Sept 24, the difference in BTC volatility has continued to be negative, which indicates that investors are still confident in BTC. In contrast, the difference in ETH volatility has turned positive this week, indicating that investors’ recent expectations for the price of ETH are relatively low.

The futures market also responded to sensitive market sentiment. The "seemingly unreasonable" price rise in the market this Friday has changed the premium of mainstream crypto futures to a large extent, especially the Bitcoin futures expiring on Oct 29, whose premium has reached more than 10%. Although the explosion of bulls in the crypto market has boosted market confidence in the short term, from the perspective of the term structure of futures, compared with last week, investors’ expectations for the medium and long-term performance of cryptos have not changed significantly. The worry still continues.

Regulation Dominates Market Sentiment, Downside Risks Remain Strong

Last week, intensive regulatory measures in various countries spread pessimism in the crypto market, which is an important reason for the low performance of cryptos.

Under China's tough regulatory measures, companies involved in crypto-related businesses in the Chinese mainland have chosen to give up their business in China and even choose to suspend business. Affected by this, overseas exchanges and decentralized exchanges are widely favored by investors, and their token prices have risen to a certain extent this week before and after the announcement of regulatory measures. Among them, the token prices of DYDX and UNI have risen by more than 30% this week.

However, further statements by the Federal Reserve and the US Securities Regulatory Commission have caused concerns about regulatory policies to spread to the entire market. SEC Chairman Gensler said that if there is no regulation, the cryptocurrency market will “not have good results”, while Fed Governor Brainard said that strict regulatory rules are appropriate for cryptocurrencies and stablecoins.

At the same time, US regulators have taken action. The US Commodity Futures Trading Commission (CFTC) imposed a fine of $1.25M on the old brand crypto exchange Kraken for providing illegal over-the-counter crypto transactions and failing to register as required. Under the influence of the regulatory attitude of the United States, Turkey and other countries have also expressed that they will further strengthen the supervision for crypto.

Although Fed Chairman Powell subsequently stated that “there is no plan to ban cryptos” and the Bank for International Settlements stated that the central bank’s digital currency may not replace cryptos, the trend of ever-increasing supervision has not changed, and the downside risk of assets due to the impact of supervision is still relatively strong.

In addition to regulatory pressure, macro market factors also show potential downside risks for cryptos.

On the one hand, the US dollar continued to rise this week, making investors' preference for low-risk assets continued. On the other hand, US Treasury yields rose to the highest level since the beginning of 2021 this week. Former US Treasury Secretary Summers said that the market may be recognizing that inflation will not cool down and the Fed will have to take more measures to control price increases. He said that the market has greatly underestimated what might happen to interest rates in the near future, and he is "considerably concerned" about the overheating of the US economy.

If the Fed takes more measures to shrink liquidity, it will be disadvantageous for the market with the characteristics of "liquidity container", especially the crypto market. The scale of liquidity outflow will be significantly increased affected by Fed, meanwhile, the market sentiment that has become more sensitive due to the superimposed effects of macroeconomics and supervision may further amplify potential downside risks.