The Nasdaq Crypto Index (NCI) closed Sunday (12/18/22) 4.5% below last week’s closing. The index’s negative performance was influenced by ether (ETH), down 7.2%, while bitcoin (BTC) fell 2.5%.
Coming out of a week where prices remained stable, investors prepared for the final Federal Open Market Committee (FOMC) monetary policy announcement in 2022 while continuing to monitor FTX fallout headlines.
After a customary Sunday night dip, crypto asset prices began rising in the early hours of Monday (EST). Digital asset prices would continue to trend upward until the early hours of Tuesday, at which point prices initiated a precipitous climb that lasted six hours.
Optimism surrounding the imminent release of US consumer price index (CPI) data sent prices soaring. The eventual publication of the Labor Department report showed investor confidence was well founded, sustaining upward momentum until briefly after market opening.
November’s CPI data showed that prices rose a mere 0.1% (expected: 0.3%) during the month, decreasing the 12-month rate to 7.1% (expected: 7.3%), its lowest since November of 2021.
Less than an hour after markets opened, prices began to lose steam and then declined in the afternoon. All major US stock indexes closed in the green that day, as did most crypto assets—with ETH and BTC climbing about 4%—despite the modest correction that occurred in the afternoon.
On Wednesday, the FOMC announced a 50 bps rate increase to the Fed Funds rate, interrupting a series of four consecutive 75 bps increases. The hike took the benchmark rate to its highest level in 15 years (4.25% and 4.5%).
The announcement came as no surprise, in light of Fed chair Jerome Powell’s recent comments confirming that it would soon be appropriate to slow down the pace of rate increases.
Nevertheless, markets were initially buoyed by the announcement, which took BTC and ETH to their respective weekly highs of $18,320 and $1,343 a couple hours before markets closed on Wednesday.
However, macro optimism was short-lived, with prices returning to pre-announcement levels during the afternoon as result of Powell's hawkish comments that reiterated his commitment to continue the battle against inflation into 2023.
This bounce may also have been influenced by the fact that crypto investors had become aware of some relevant news regarding Binance. The world’s largest centralized crypto exchange had registered $1 billion in net outflows (value of assets deposited minus value of assets withdrawn) during the previous 24 hours.
Whatever was causing the unusually high rate of withdrawals seemed to be exclusively impacting Binance, as its negative outflow exceeded that of all other exchanges combined.
On Thursday, prices would continue to drop to then plummet on Friday afternoon on the back of news that Binance had gone through $6 billion in outflows from Monday to Wednesday.
Binance CEO Changpeng “CZ” Zhao downplayed concerns in several media interviews. “People can withdraw 100% of the assets they have on Binance, we will not have an issue in any given day,” claimed CZ in a CNBC interview.
Additionally, Binance revealed that proof-of-reserves auditor Mazars had paused its work for the exchange and other crypto clients. Mazars later revealed that it had halted reviews “due to concerns regarding the way these reports are understood by the public." The company added that its reports “do not constitute either an assurance or an audit opinion on subject matter.”
By Friday night, BTC and ETH had reached their respective weekly lows of $16,650 and $1,168. Crypto assets prices would then spend the weekend trading sideways around Friday’s lows.
This week's macro calendar will be headlined by US GDP figures on Thursday and the release of the personal consumption expenditures (PCE) price index on Friday. Both data points could help shape market expectations regarding macro conditions in 2023. Crypto investors will continue to monitor Binance’s outflows, although Bloomberg has reported that withdrawals have slowed since the first half of last week.
More from Powell’s speech
Jerome Powell disappointed investors hoping the Fed chair would reassure them that the hike-related pain is over after several consecutive inflation readings showing prices were slowing down.
Instead, during Wednesday’s press conference, investors were met with comments like “It will take substantially more evidence (that price stability has been achieved),” and “We’ve made less progress than expected on inflation.”
If Powell is worried about tightening and its potential impact on the US economy, it certainly didn’t show during Wednesday's press conference.
In any case, the Fed dot plot showed that FOMC officials expect rates to increase to just over 5% in 2023, which means we are likely to get two or three more rate increases (depending on size) before the Fed Funds rate finally stabilizes next year.
If inflation figures continue to show price increases are slowing down on a 12-month basis, focus may begin to shift to labor market indicators, which have remained consistently strong despite rapidly increasing rates.
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