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How the Fed is manipulating the cryptocurrency market

The cryptocurrency repressions by US regulators are leading to a shift in investment flows from the US to Asia. But the trend gained momentum a little earlier and has a direct correlation with the Fed's monetary policy.

The Covid-19 epidemic led to the emergence of easy money, as the zero key interest rates from March 2020 provided businesses with ultra-cheap loans that flowed into various sectors. The crypto industry has been no exception, with institutional investors investing $1 million or more from this year onwards becoming a key investment force.



Investments were directed into crypto funds, mining and various products. In January 2020, the US share of Bitcoin mining was only 3.5%. Two years later, it was 37.8%. The country's computing power has increased 19-fold during this time.



In a fight against natural inflation, the Fed has turned the other way around, as it began to raise its key rate at a shocking pace in the second half of 2022. This was when an 11% drop in Bitcoin supply from the US was seen, with Asia stepping in to replace it.



The cut to the easy money flow in 2022 affected projects with indirect financial management focused on attracting new participants. Terra (LUNA) was the first to get hit in May, followed by Celsius and FTX. The decline in confidence among market participants couldn't help but affect the overall capitalisation of the industry and the value of Bitcoin.



Now, US regulators are tightening the screws, calling the cryptocurrency market the 'Wild West' while ignoring their own discrepancies. For example, the SEC considers Ethereum to be a security, filing a lawsuit against Coinbase in relation to that. However, the CFTC calls the very same cryptocurrency a commodity and has brought charges against Binance.

The Fed's role in pumping up the financial bubble has also not been addressed. Back in mid-2020, Coinbase CEO Brian Armstrong noted a surge in deposits after Covid-19 payouts in the United States after every adult received $1,000 plus $500 per child in April 2020.

This raises the question: would investor losses have been so significant if the Fed hadn't printed dollars so aggressively and if the regulators had worked promptly with legislators to develop and adopt regulations governing all aspects of the industry?

Instead, SEC Chairman Gary Gensler responded yesterday to reporters, defending the agency's repressive policy: "They [companies] may have made a calculated economic decision to take the risk of enforcement as the cost of doing business."


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Altcoins' troubles don't affect hodlers' mood

Last week, altcoins dropped by around 20%. Among the major projects, massive damage was taken by those the SEC declared securities in lawsuits against Binance and Coinbase. As a result of the legal action by the SEC, Solana is trading 29% lower, and Cardano has seen a 28% decline.



In one of his latest interviews, SEC Chairman Gary Gensler claimed that all altcoins are securities. This explains the broad decline in the market despite the narrow list of coins mentioned in lawsuits brought by the SEC and Bitcoin's resilience amidst current events.

Since Coinbase was sued, reserves in Ethereum have fallen by 8% or 291,000 ETH. Meanwhile, users' presence in Bitcoin and stablecoins has remained almost unchanged.



The bad news resulted in higher interactions with the affected crypto exchanges. The outflow and inflow have grown by 70% to $845 million a month, with the volume of outflow 10% higher than that of inflow. However, the figures aren't that impressive. Total transfer volume remains at cyclical lows, with a turnover of $2.9 billion a day.



The main reaction to the negative developments came from short-term holders (STHs), whose share of coin inflows to cryptocurrencies jumped to 76.4%. STHs are primarily represented by traders trying to profit from the short-term growth or decline of assets. The share of interexchange transfers fell to 21.7%, while long-term holders (LTH) showed little to no reaction (1.9%).



Since STHs held positions for less than six months, they've mostly exited at the same prices they bought the cryptocurrency (the so-called breakeven level). This is clearly demonstrated by the realised profit and loss indicator remaining at minimum levels.



Traders have strongly reacted to negative developments by getting rid of some altcoins. That said, investors and long-term hodlers (LTHs) remained indifferent to the situation.

First, recognising altcoins as securities via lawsuits is a difficult task, as proved by the SEC's lawsuit against Ripple that's been in motion since 2020. XRP hasn't even participated in the latest sale since some participants are absolutely certain that 2023 will be a good year for the company.

Second, the court case is likely to be heavily delayed, and risky assets could get a boost as early as this week if the Fed pauses its rate hike tomorrow. For the last year, the US dollar has been losing positions on the international stage, showing a decline in global reserves and payments. Some analysts consider this chaotic tightening of crypto regulations to be a sign of desperation.


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Traders bet on Binance Coin's (BNB) decline

Lawsuits brought by the SEC against Coinbase and Binance have led to the collapse of altcoins, as SEC Chairman Gary Gensler is only willing to consider Bitcoin a commodity. In his view, other coins are securities that crypto exchanges must be licensed to operate.

Because of the wave of sell-offs, the share of altcoins, excluding Ethereum and stablecoins, has fallen below 20%. Many of them have collapsed by over 80% from their all-time highs.



Challenging times await BNB investors: a wide range of allegations have been made against Binance, including that it deliberately circumvented restrictions when dealing with US customers, commingled funds and engaged in market manipulation.

According to former SEC Head John Reid Stark, the Department of Justice will soon join the prosecution process. This is evidenced by the regulator's application to freeze all accounts of the US unit in the absence of money laundering and tax evasion charges.

Traders are already buying rumours, with open interest in BNB reaching 42%, while most altcoins have declined after a wave of sell-offs.



The funding rate collapsed to -0.08% from neutral in early June. A negative rate indicates the significant dominance in futures contract trading of bears, who are forced to pay a premium to the few buyers.



BNB is trading at a 17% discount after the charges but is still among the top 5 coins by market capitalisation.



However, if the Department of Justice were to file charges and freeze the US unit's accounts, it would deal a further blow to BNB's position. Given these circumstances, traders ramped up sales. Some have been overzealous with leverage, which has already led to a forced closure of several bearish positions and a short squeeze. BNB saw the fourth-most liquidated positions in the last 24 hours (third-most if only sellers are taken into account).



However, the outlook for BNB remains negative, and the likelihood of further price declines remains high. The SEC has charged both Binance's US unit and the company's CEO, Changpeng Zhao.


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MicroStrategy CEO: regulators will cause Bitcoin to rise to $250,000

MicroStrategy is the largest public holder of Bitcoin, possessing a reserve of 140,000 coins. This now amounts to $3.5 billion and accounts for 0.7% of the total supply.



MicroStrategy CEO Michael Saylor believes that the current changes in cryptocurrency regulation will increase market transparency and Bitcoin's dominance.

Instead of trying to break down cryptocurrencies into asset classes through clearly defined criteria, the SEC chairman is willing to label all altcoins as securities. This has already led to Bitcoin's share of the cryptocurrency market increasing from 40% to 47% in 2023.



As only Bitcoin has the unambiguous status of being a commodity, crypto exchanges and other market players will have to rely on it for the most part. The increase in the transparency of regulations will push institutional actors to take more active actions. But for now, however, they're doing the opposite; they've cut their presence in Bitcoin funds, with an outflow exceeding $400 million in eight weeks.



The advent of a proper regulatory framework will also pave the way for a long-awaited Bitcoin ETF in the US instead of a Bitcoin futures ETF (we covered the shortcomings of the latter here).

According to Michael Saylor, Bitcoin's further capture of market share would see its percentage of the cryptocurrency field grow to 80% and its price rise to $250,000.



A more down-to-earth estimate for the next 12 months can be obtained by extrapolating cycles starting from major historical highs.



The new cycle largely repeats previous ones, suggesting growth by mid-2024 of 50-100% on the current price to reach the $38,000 to $50,000 range. Saylor didn't specify by which year he expects the price to reach $250,000.


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Celsius' sell-off will hurt altcoins

By early 2022, Celsius was one of the largest lenders in the cryptocurrency market, operating with $12 billion in assets under management and $8 billion in loans. Investors were attracted to Celsius by the promised yield of 6% when investing in Bitcoin and up to 17% in other cryptocurrencies.

Problems emerged with the crash of Terra in May 2022, the project responsible for issuing LUNA and the UST stablecoin (at the time, the third-largest stablecoin, with a capitalisation of $20 billion). UST was an algorithmic stablecoin (with little or no backup collateral) directly linked to LUNA's price. Staking in UST was encouraged by yields of up to 20%. The decline in new customer inflows in the spring couldn't ensure consistency of payouts. And so UST and LUNA went into a deep downward dive.



It turned out that Celsius was linked through investments with Terra and a bunch of other collapsed projects, like the hedge fund 3AC. It later emerged that management was trying to win back the cryptocurrency market using client funds and margin trading. But it only got worse. The company filed for bankruptcy on 13 July, with an estimated $1.2 billion deficit and owing a total of $4.7 billion to its customers.

Investors' problems are further complicated by the fact that the bulk of the assets were denominated in CEL's token, which collapsed from $4 in early 2022 to the current $0.10.



In addition to CEL, its assets still contain various other altcoins worth $220 million. Polygon's MATIC is second to CEL in terms of volume, coming in at $52 million.

On 1 July, the company planned to convert all available altcoins to Bitcoin and Ethereum, supposedly because of the SEC tightening its grip.



The plan must be approved during a bankruptcy court hearing, and not everyone involved in the process agrees with it. If the decision is affirmative, altcoins will face renewed pressure in July.


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Bitcoin is increasingly dominating the crypto market

Despite Bitcoin's market price fluctuating sluggishly just above $26,000 in recent days and the asset's market cap coming in at just over $500 billion, the asset's increasing market dominance shows market participants' interest in the digital currency. This indicator set its two-year high, reaching a market share of 50%.



The news that BlackRock, which manages around $9 trillion in assets, has filed an application to register a Bitcoin spot exchange-traded fund (ETF) has sparked interest in Bitcoin among market participants. It would make it easier for institutional investors, including pension funds, to own cryptocurrencies. This is a very good signal for Bitcoin, indicating a growing interest in it from serious financial institutions.

Another factor behind Bitcoin's growing market dominance has been a decline in investor interest in altcoins amid recent lawsuits brought against them by the US SEC. SEO chief Gary Gensler previously declared that he considers all cryptocurrencies except Bitcoin to be securities. However, he categorises Bitcoin as a commodity, which is a significant exception and puts the currency in a privileged position.



Such statements from the SEC official are critical for Ethereum, the second-most-popular and market-dominating digital currency (with a share of 20%).



After all, once it switches to the Proof-of-Stake algorithm, it falls well within the US regulator's definition of a security. The situation for this asset will become even more challenging after the launch of the EIP-1559 upgrade, which will result in the network stopping token burning and adding to its value.



Bitcoin could gain even more market share in the near future to push it over 50%. The other cryptocurrencies, on the other hand, continue to lose weight.


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Ethereum may be recognised as a commodity like Bitcoin

US authorities may make an exception for the digital currency Ethereum in order to protect investors' interests and classify it as a commodity rather than a security, experts at US investment bank JPMorgan believe.



They reached these conclusions after the litigation between the SEC and Ripple, a case that started back in 2020, resulted in the release of the "Hinman documents".

They reveal the position of William Hinman, the former head of the SEC's Division of Corporation Finance, that he shared in 2018. At the time, he said that neither Bitcoin nor Ethereum could be considered securities.

This thesis has led experts at JPMorgan to believe that the regulator will make an exception for Ethereum and not include it in the list of assets that qualify as securities. In this way, the asset would avoid the strict regulation it would be subject to under US law.

However, in early 2023, current SEC chief Gary Gensler classified only Bitcoin as a commodity and once again reiterated his position on the issue in June. In doing so, he declined to answer a question about Ethereum's status.



ETH is currently valued at just over $1,840 on the market and is the second-largest cryptocurrency by market capitalisation among all digital assets in the world at over $200 billion.



Of course, the possibility of Ethereum joining Bitcoin and avoiding the risk of being recognised as a security opens up very good prospects for this digital asset. As investor interest in the token increases, it could rise to the psychological $2,000 mark and subsequently even higher than that.



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Americans are buying up Bitcoin

Bitcoin posted a nice 11% gain in June, mainly driven by interest from US traders. Unlike European and Asian players, Americans have been generating steady demand throughout the month, according to analyst agency Glassnode.



Dividing crypto exchanges by region and analysing their inflows and outflows show a clearer picture. Glassnode classified Coinbase, Kraken and Gemini as the US region and Binance, OKX and Huobi as the Asian region.

As Bitcoin's price rose in 2023, Asian market players poured coins into cryptocurrency exchanges (primarily to sell them). During this time, Americans remained neutral. In June, activity in Asia dried up, while Americans showed an outflow of funds (predominantly to cold wallets). This outflow has been brought on by the anticipation of rising prices and the risk of funds in Binance being frozen due to legal action brought by the SEC.



Institutional investors showed a surge of interest in Bitcoin in the past week and have invested a record amount over the past year.



The excitement stems from a mass of applications to the SEC to launch Bitcoin spot ETFs. Even BlackRock, the world's largest investment company by assets under management, is included in this group. Yesterday, we talked about why optimism surrounding this news may be premature.



Institutional investors from Europe were the most active, showing a weekly inflow of $85.5 million into cryptocurrency funds. Investors from the US invested $58.9 million. One factor holding back US players is the lack of Bitcoin spot ETFs, while futures ETFs are eating up some of the profits as they move from contract to contract (a loss from a phenomenon known as contango).



Interest in Bitcoin is fuelled both by its good start in 2023 and by anticipation of the first Bitcoin spot ETF in the US. Even regulators' lawsuits against Binance, Coinbase and a number of other players haven't cooled US participants' interest in cryptocurrencies.


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Mining is more sustainable than the vast majority of industries

A widely used assessment of Bitcoin mining's sustainability claims that 37.1% of the energy it uses is zero-emission. The Bitcoin Mining Council (BMC) made a more accurate calculation that arrived at 52.6%. After a joint discussion of the methodology, the Cambridge Centre for Alternative Finance (CCAF), which is responsible for the first analysis, agreed with the BMC's estimate.



If mining were to rely 100% on the public grid, CCAF's estimate of 37.1% zero-emission energy would be correct, as humanity gets most of its energy from burning minerals. Of those sources, coal continues to lead, with a share of 36.7%.



Mining companies strive to optimise processes as much as possible and to obtain the cheapest energy. This is only achievable with zero-emission energy sources. These include solar, wind, geothermal, nuclear, hydropower and flaring associated gasses (which would otherwise be burnt with no additional benefit).

14.3% of the Bitcoin network's hashrate is provided by mining companies powered by near-zero-emission energy sources. We have already covered the lowest electricity rate in the US, $0.02 per kWh, which TeraWulf achieved through a direct connection to a nuclear power plant. Northern Data is leading in Europe with a rate of $0.03 from renewable energy sources.



The trend towards green energy sources is gaining momentum. For example, one of the largest miners, Marathon, recently moved its 100 MW data centre from a coal-fired power plant to a wind farm in Texas in January.

BMC calculates that, on average, the Bitcoin network becomes 2% greener each year.



The green agenda is crucial for mining, as a number of conservative politicians are pushing bills to restrict or further tax the industry in the name of environmental concern.



High sustainability increases Bitcoin's investment appeal and removes a key advantage among altcoins on PoS blockchains.


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Miners selling record volumes of Bitcoin

After a pretty disastrous 2022 when miners were forced to switch from a holding strategy to a sell-off of their strategic reserves, Bitcoin reaching a key psychological level can be viewed as a smashing success. Bitcoin's passing the $30,000 barrier last week incited crypto miners to send record volumes of coins to exchanges at a total value of $128 million.



Miners are concerned that a price reversal from this key level could be impending due to several negative factors, including harsher crypto regulation in certain countries and the legal action taken against crypto exchanges in the US. What's more, the average cost of mining continues to lead prices on account of the doubling of calculation difficulty over the last 18 months.



That said, Bitcoin will still be able to avoid downward pressure, even if all the coins sent by miners to exchanges are cashed out.



And it's all down to growing institutional demand. Thus, June saw investments increase by 70% YoY to reach $33 billion of assets under management (AUM) by crypto investment funds.



What's more, a single major public holder, MicroStrategy, bought 12,333 BTC worth a total of $347 million over the last two months. The company now holds 152,333 BTC, at an average price of $29,668 per coin. Q1 2023 was the first profitable quarter MicroStrategy has had since 2020.

Interest in the cryptocurrency has hotted up significantly following a raft of new spot Bitcoin ETF applications to the SEC. The applicants include one of the biggest investment firms in the world in terms of assets under management, Blackrock. According to several experts, the presence of such a major player at the table will only increase the likelihood of the application being approved.



If the fund does go ahead, Bitcoin is likely to be met with a new wave of institutional demand. Traders are already buying the rumour, which has been reflected in a higher overnight rate for perpetual futures since the news was released.


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The altcoins facing a tough time in July

Despite the negative agenda from regulators and a series of lawsuits against market participants, June marked a month of growth for cryptocurrencies, with the total capitalisation rising 5% to $1.24 trillion.



Bitcoin Cash (BCH) returned impressive figures, up 160%. From amongst the top ten coins, Litecoin soared by 20%.



Nevertheless, regulators (primarily the SEC) have had a significant impact on the revaluation of coins. The aforementioned BCH and Litecoin both received a significant boost in June from the launch of the EDX Markets exchange for institutional investors in the USA. When launching the service, EDX was keen to emphasise that its service works with cryptocurrencies against which the SEC has no complaints: Bitcoin, Litecoin, BCH, and Ethereum. Despite complaints against staking, Ethereum was not classified as a security in the lawsuits.

But amongst the big projects that have come under fire from the regulator are Solana, Cardano and Polygon. They were labelled as securities, which led to negative results for the month of June.



From the looks of things, they won't fare any better in July either. Firstly, because of the SEC's stance, market participants are turning their backs on the coins in question. US-registered Revolut, for example, notified its customers on June 29 of a ban on the purchase of Solana, Cardano, and Polygon. On September 18, there will be a forced sale of these coins which remain in customers' accounts. Similar steps had already been taken by Robinhood, eToro, and Bakkt.

Secondly, on June 30, the court allowed Celsius to start converting altcoins into Bitcoin and Ethereum, something we warned about in mid-June. MATIC (Polygon) is the second one after Celcius, facing the most pressure due to the sell-off of the CEL token  - it owns 90 million coins worth $61m.

Relative to the $6.4bn capitalisation, this amount might seem insignificant, but coupled with the negative news backdrop, an increase in supply does not bode well for MATIC. In addition to MATIC, Celsius also has 161,000 SOL (Solana) worth $31m and 103 million ADA (Cardano) worth $30m.


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Bitcoin's cyclicity: $1m in 2026

Bitcoin remains committed to a four-year cycle, which resonates with the halving where the profits from block mining are halved in value. An illustrative radial chart was presented by an analyst under the nickname "Root". Going round in four-year cycles, the price forms highs and lows in the same sectors of the cycle. Having hit bottom in 2023, Bitcoin is expected to reach $1m in 2026.



The coming bull market is indicated not only by mathematical extrapolation, but also by shifts in macroeconomics. We covered the direct impact of monetary policy in the article "How the Fed is manipulating the crypto market". This summer, the regulator is preparing to give the final chord in a cycle of key rate hikes with a reversal in 2024. After which, risky assets (in the absence of a deep recession in the economy) are set to experience an influx of investment.



Institutional investors and fund managers are already showing appetite for risk. The SEC was inundated with new applications for Bitcoin ETFs in June. The market sharks do not want to miss out on the coming bull cycle. Among the applicants, Black Rock, the world's largest asset management investment company, is worth mentioning. Note: The SEC flagged up shortcomings in the applications and companies have already submitted redacted versions.

ETFs on futures contracts and other exchange-traded funds in other countries collectively also saw inflows for the second week in a row. This contrasts strongly with the apathy reflected in the first half of the year.



Accumulation sentiment among long-term holders has reached a new historic high of 13.4m BTC, with cryptocurrency exchanges recording a decline in supply. Investors are holding on to the coins in anticipation of further price growth.



Another halving will take place next year, which traditionally has a stimulating effect on BTC price. This, combined with the Fed's rate cut, will give a strong boost to Bitcoin.



However, it's worth bearing in mind that cyclical models do not guarantee anything and any predictions should be treated with a healthy dose of scepticism.


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Crypto industry employment report

How many people are working in this field? What is the capitalisation of the companies rather than the tokens? Which region is the leader in employment? Detailed answers to these questions were prepared by the analytical agency K33 Research.



Today, the crypto industry comprises 10,000 companies with a total estimated value of $180 billion. At its peak, the number of employees reached 211,000 in 2021, though the industry now employs 188,000.



A distinctive feature of the crypto industry is the high proportion of employees working remotely, all around the world, without being tied to the company's headquarters. For example, the largest crypto exchange, Binance, is based in Malta, yet the majority of its employees work out of Nigeria.



When it comes to the industry as a whole, the largest number of those employed by the crypto industry reside in Asian countries (including Australia). After China's regulatory tightening, leadership in the region has shifted to India. Globally, however, India is in third place at 7% after the US (29%) and the UK (24%).



By line of business, the largest number of people are employed in companies focused on trade and investment services. The NFT sector, on the other hand, is among the outsiders since turnover has fallen 90% from historic highs.



In general, however, the crypto industry job market correlates with the overall capitalisation of cryptocurrencies. In periods of growth, companies expand and increase staff. When a crisis strikes, they reduce their workforce.



Market participants are now preparing for a new bullish cycle, as evidenced by the growth of institutional interest and the approaching reversal of the Fed's monetary policy. This will eventually affect the job market, as well, with the total number of employees in the crypto industry capable of hitting 300,000 by 2025.


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Bitcoin under pressure: Miners, Mt.Gox and the US government

Yesterday, most financial instruments rose against the US dollar amid new inflation data predicting that the Fed will soon pass on raising interest rates and change its monetary policy stance. Price growth in the US has reached the central bank's target level of between 2.0% and 2.5%.



Bitcoin continued to trade in the range, though it was curbed by some negative factors.



Because of the mining difficulty, the daily mining profit lingers near the all-time low of $0.05 per terahash of capacity. The indicator is currently $0.07, though it reached $0.40 in Autumn 2021.



Low profitability and concerns about the price dropping again are pushing miners to sell freshly mined coins and accumulated reserves. According to Bitcoin Magazine, miners have moved a six-year high volume of BTC stock to exchanges.



The upcoming payouts to the clients of the bankrupted Mt.Gox are another restraining factor on BTC's price. The amounts are due to be paid by the end of October. Mt.Gox has kept around 135,900 BTC in its account, which amounts to a whopping $4.8 billion at current prices.

Some analysts don't think this sum may significantly affect the market, but they still highlight the event's unique nature and possible price pressure from speculation based on the news.

The same can be applied to the latest news on Bitcoin being moved from the US government's accounts. Reportedly, they were credited to the exchange's account to then be sold. Three transactions were conducted that totalled $300 million.



The abovementioned factors are raining on Bitcoin's parade but can't create long-term price pressure.

- Miners' reserves are exhausted, with daily mining amounts reaching 900 BTC, creating $800 million of pressure.
- According to data, the US government is selling off over 10,000 BTC a quarter, the equivalent of 3,000 BTC or $90 million a month.
- Mt.Gox will pay out $4.8 billion, but the payouts can be done in cryptocurrency upon request. That means that not all of the 135,900 BTC will end up on exchanges to be converted into fiat or stablecoins.

Bitcoin's daily trading amount exceeds $12 billion. And the market can easily handle the abovementioned transactions if they're not performed all at once.


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