Hero's Image

Week in Review: Fed policy and liquidity stress drives crypto lower


The NCI opened the week 29.3% below last week’s closing. The index’s performance was heavily influenced by Bitcoin, down 28.3%, while Ethereum fell by 27.3%.

The crypto market suffered another week of heavy losses as the Federal Reserve ramped-up its interest-rate tightening cycle and large institutional players, including funds and lending platforms, faced liquidity problems and potential insolvency.

The market's poor performance sent prices tumbling past a series of important psychological thresholds for the first time since the end of 2020/start of 2021: Bitcoin fell below $20,000, Ethereum traded under $1,000, and the aggregate crypto market cap sank past $1 trillion. 

As the week started, the debate surrounding the Federal Open Market Committee (FOMC) interest rate hike, due to be divulged on Wednesday, quickly evolved. Market participants were still discussing the previous Friday's Consumer Price Index May reading, which showed inflation had gained momentum since April and reached 8.6% on a year-over-year basis.

During the weekend, only the most pessimistic analysts predicted a 75 bp hike. Fed Chairman Jay Powell had denied the FOMC had been “actively considering” such a hike in a statement made in May. 

On Monday, CME’s FedWatch tool still reflected Powell’s previous comments, showing a 25% chance of a 75 bp hike. However, on Tuesday, the Wall Street Journal published an article titled “Fed Likely to Consider 0.75-Percentage-Point Rate Rise This Week.”

Analysts interpreted the headline as an attempt by the Fed to forewarn the market, seeking to align market expectations and avoid a surprising decision on Wednesday. On the morning that preceded the announcement, the probability of 0.75% hike had been priced in with 95% certainty, with the remaining 5% pointing to 100 bp hike.

The growing consensus around a more hawkish FED seems to have concerned investors, as the price of Bitcoin neared $20,000, briefly before US markets opened on Wednesday morning.

The Fed’s ongoing battle against inflation wasn't the only negative driver for crypto markets last week. While the FOMC confirmed the first 75 bp hike since 1994, crypto investors were consumed by a string of worrying headlines revealing an ongoing credit crunch driving institutional players towards insolvency. 

On Wednesday, Three Arrows Capital (3AC), a crypto hedge fund ($18 billion AUM), suffered at least $400 million in liquidations. The news about 3AC’s woes came on the heels of Celsius Network’s announcement that confirmed the suspension of all withdrawals and transfers between accounts due to "extreme market conditions." Both companies may now be insolvent. 

The ongoing credit crunch stoked fears that a systemic crisis may take hold in the digital assets market, in part as a delayed reaction to the collapse of the TerraLabs tokens (LUNA and UST).

According to The Block, Celsius sent at least 261,000 ETH ($535 million at current prices) to Anchor Protocol in 2022, TerraLabs' lending platform that offered high yields for deposits of Terra USD (UST), Terra’s algorithmic stable coin. Meanwhile, 3AC has informed the Wall Street Journal that it suffered heavy losses as a result of the Luna collapse. 

Celsius has also been compromised by positions in assets with low liquidity, such as stETH (Staked Ether), a synthetic representation of Ethereum tokens (ETH) locked in the Beacon Chain until the Ethereum network upgrade is implemented.

The value of this synthetic has been straying from its ETH peg since May. If Celsius is forced to sell its stETH, the platform could suffer significant losses and further accentuate the price disparity between stETH and ETH, possibly compromising other market participants, including 3AC, which also owns the synthetic.

On Friday, two other CeFi platforms, Babel Finance and Finblox, froze or capped withdrawals, both contaminated by 3AC’s possible insolvency. The increasing levels of uncertainty weighed on investors, sinking Bitcoin’s price to nearly $17,500 and ETH to $880 as US markets closed on Friday.

Investors now fear that the spread of the credit crunch could impose greater sell pressure on the market, as large institutional investors dump their assets to meet margin requirements, further spreading the contagion. 

The tumultuous week for the DeFi industry has sparked critics to question the lack of transparency of CeFi platforms, which act like banks but don't offer the same degree of transparency or the safeguards guaranteed by traditional financial institutions.



The information contained herein (“Information”) may not be reproduced or redistributed in whole or in part, in any format, without the express written approval of Hashdex Asset Management Ltd. (“Hashdex”) and its affiliates and subsidiaries (“Hashdex Group”). By accepting this document, you acknowledge and agree that all of the Information contained in this document is proprietary to Hashdex Group. While not explicitly referenced within this piece, Hashdex Group manages the Hashdex Nasdaq Crypto Index ETF, Hashdex Nasdaq Ethereum ETF, Hashdex Nasdaq Bitcoin ETF, Hashdex DeFi Index Fund, Hashdex Smart Contract Platforms Index ETF and other investment vehicles focused on digital assets (collectively the “Fund” and each a “Fund”) which invests in digital tokens. The Information is not an offer to buy or sell, nor is it a solicitation of an offer to buy or sell, interests in the Funds or any advisory services or any other security or to participate in any advisory services or trading strategy. If any offer and sale of securities is made, it will be pursuant to the confidential offering memorandum of the Fund (the Offering Memorandum). Any decision to make an investment in the Fund should be made after reviewing such Offering Memorandum, conducting such investigations as the investor deems necessary and consulting the investor’s own investment, legal, accounting and tax advisors in order to make an independent determination of the suitability and consequences of an investment.

Each Fund seeks to track a relevant index. The performance of each Fund will vary from the performance of the relevant index that it seeks to track. The Information is being provided to you solely for discussion purposes and may not be used or relied on for any purpose (including, without limitation, as legal, tax or investment advice) without the express written approval of Hashdex Group. Certain statements reflect Hashdex Group’s views, estimates, opinions or predictions (which may be based on proprietary models and assumptions, including, in particular, Hashdex Group’s views on the current and future market for digital assets), and there is no guarantee that these views, estimates, opinions or predictions are currently accurate or that they will be ultimately realized. To the extent these assumptions or models are not correct or circumstances change, the actual performance of Hashdex Group and the Funds may vary substantially from, and be less than, the estimated performance. None of Hashdex Group, the Funds nor any of their respective affiliates, shareholders, partners, members, directors, officers, management, employees or representatives makes any representation or warranty, express or implied, as to the accuracy or completeness of any of the Information or any other information (whether communicated in written or oral form) transmitted or made available to you. 

Each of the aforementioned parties expressly disclaims any and all liability relating to or resulting from the use of the Information or such other information. Except where otherwise indicated, the Information is based on matters as they exist as of the date of preparation and not as of any future date and will not be updated or otherwise revised to reflect information that subsequently becomes available, or circumstances existing or changes occurring after the date hereof. Investing in financial markets, the Funds and digital assets, including Bitcoin, DeFi tokens, and Ethereum, involves a substantial degree of risk. There can be no assurance that the investment objectives described herein will be achieved. Any investment in the Funds may result in a loss of the entire amount invested. Investment losses may occur, and investors could lose some or all of their investment. No guarantee or representation is made that Hashdex’s investment strategy, including, without limitation, its business and investment objectives, diversification strategies or risk monitoring goals, will be successful, and investment results may vary substantially over time. Nothing herein is intended to imply that the Hashdex Group’s investment methodology or that investing any of the protocols or tokens listed in the Information or the Funds may be considered “conservative,” “safe,” “risk free,” or “risk averse.” Neither historical returns nor economic, market or other performance is an indication of future results. Certain information contained herein (including financial information) has been obtained from published and non-published sources. Such information has not been independently verified by Hashdex Group, and Hashdex Group does not assume responsibility for the accuracy of such information. Hashdex Group does not provide tax, accounting or legal advice. Certain information contained herein constitutes forward-looking statements, which can be identified by the use of terms such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue” or “believe” (or the negatives thereof) or other variations thereof. Due to various risks and uncertainties, including those discussed above, actual events or results, the ultimate business or activities of Hashdex Group or the Funds or the actual performance of Hashdex Group, the Funds, or digital tokens may differ materially from those reflected or contemplated in such forward-looking statements. As a result, investors should not rely on such forward- looking statements in making their investment decisions. None of the Information has been filed with the U.S. Securities and Exchange Commission, any securities administrator under any state securities laws or any other governmental or self-regulatory authority. No governmental authority has opined on the merits of the offering of any securities by the Funds or Hashdex, or the adequacy of the information contained herein.

Logo Hashdex
The material contained on this website is for informational purposes only and Hashdex, and its affiliates, is not soliciting any action based upon such material. The material is not to be construed as investment advice nor is it to be construed as recommendation, offer or solicitation to buy or sell any financial instrument or product or to adopt any investment strategy. Further, the material contained on this website does not constitute a representation that the financial instruments described therein are suitable or appropriate for any person. Past performance is not an indication of any future performance. This website may contain advertising of financial products.