First mover Asia: Crypto momentum falters as Bitcoin retreats to $23.6k

Prices

Bitcoin soars early past $25K, tumbles late below $23.5k

Bitcoin was rising again Thursday and then it wasn't as investors seemed to have second thoughts about persnickety inflation, Fed monetary policy and crypto industry woes.

The largest digital asset by market capitalization was recently trading at about $23,618, down 4.8% over the past 24 hours and well off its high earlier in the day above $25,100. That mark represented BTC's first sojourn above $25,000 since August, reflecting rising optimism about inflation and the economy. But both seemed to vanish in the space of a few hours as an unexpected 0.7% month-over-month spike in January's Producer Price Index (PPI) suggested that the U.S. central bank monetary had not yet succeeded in taming price increases that have bedeviled the economy for more than a year.

Industry-specific problems during the day also offered a reminder that crypto itself remained on rocky ground as investment bank D.A. Davidson analyst Chris Brendler downgraded Coinbase (COIN) to neutral from buy; a New York judge overseeing the criminal fraud case of Sam-Bankman Fried warned he might revoke the bond of the former CEO of disgraced crypto exchange FTX if Bankman-Fried continued to defy bail conditions; and decentralized finance (DeFi) protocol Platypus Finance suffered a flash-loan attack with a potential loss of $8.5 million.

Other cryptos turn red

Ether followed a similar path to BTC, rising well above $1,700 for the second consecutive day before retreating. The second largest crypto by market capitalization was recently changing hands at about $1,650, down more than a percentage point. Other major cryptos also seesawed with APT, the token of layer 1 protocol Aptos, recently sinking 7.9% after rising more than 9% earlier in the day. MATIC, the native crypto of layer 2 blockchain Polygon Network was up over 6.3%, despite paring gains from earlier. Popular meme coins DOGE and SHIB were both firmly in the red a day after rising handsomely.

The CoinDesk Market Index, a measure of overall crypto markets' performance, was recently down about 3.8% after spending much of the previous 36 hours in the green.

Equity markets, meanwhile, flinched at the PPI data with the tech-heavy Nasdaq, the S&P 500 and Dow Jones Industrial Average (DJIA) all declining well over a percentage point. Investors remain wary about a strong employment market, an inflationary sign suggesting that economic growth remains solid.

Still, the recent crypto rally has a number of analysts feeling optimistic about prices. "The CPI in the U.S. has been playing a less influential role as more evidence shows inflation has proven to be stubborn to tackle, and investors are adapting and cautiously getting into risky assets as a way of coping mechanism.," Adrian Wang, founder and CEO at digital assets wealth management company Metalpha Limited, said prior to the Thursday downturn.

"We can expect the market going more bullish ahead," he said.

And Darius Tabatabai, the co-founder of Vertex Protocol, a London-based decentralized exchange, said that crypto markets seemed willing to move past the industry's myriad problems. "The news that the SEC was investigating BUSD earlier this week led to some pullback in prices, but with the market seeming to slowly shrug off the news and retail sales data hinting at a soft landing for inflation, and we may have the makings of another bull market," Tabatabai said.

Insights

Alameda research's contagion effects linger as startups postpone their token launches

The crypto market is struggling with an "Alameda gap," with several projects postponing their token launch plans because of a lack of liquidity despite surging bitcoin (BTC) and ether (ETH) prices.

Data from crypto price tracking platform CoinMarketCap shows that new coin applications fell throughout 2022, from 10,264 in the first quarter to 6,350 in the fourth. The drop accelerated toward year's end after crypto exchange FTX and its sister concern Alameda Research collapsed in November. Before going bust, Alameda was one of the largest market makers, providing billions of dollars of liquidity to large-cap and small-cap tokens.

Year to date, the figure is just 3,000 applications.

“Post-FTX we have seen liquidity dry as up to 50% on major coins,” Guilhem Chaumont, CEO of Paris-based market maker and brokerage Flowdesk, said in an email. “On smaller market caps, the liquidity reduction has been even worse because Alameda has closed all their support for token issuers and other big market makers have reduced their exposure and activity.”

Chaumont said he is advising projects to postpone by three to six months. Flowdesk expects the bear market to be around for another 12 to 18 months.

Last month, the recently decentralized exchange dYdX said it was planning to delay its token unlock, which would release more than 150 million tokens to early investors and founders, to December 2023 with hopes that the market will have recovered by then. People familiar with the matter say it is because of concern over market liquidity.

Liquidity in bitcoin and ether markets as measured by the 2% market depth has dried up since Alameda went down, making it harder for traders to execute big orders without affecting the market price and for projects to issue new tokens.

The 2% depth represents a collection of the buy and sell orders within 2% of the mid-price – the average of the bid and the ask/offer prices being quoted at a given time. Data tracked by Paris-based Kaiko show the 2% market depth for BTC fell to less than 8,000 BTC in January even as the cryptocurrency rallied over 40%.

“Crypto liquidity is dominated by just a handful of trading firms, including Wintermute, Amber Group, B2C2, Genesis, Cumberland, and (the now-defunct) Alameda. With the loss of one of the largest market makers, we can expect a significant drop in liquidity, which we will call the “Alameda Gap,” Kaiko wrote in a November briefing note.

Data from Arkham Intelligence shows that balances at key market makers have dropped. Cumberland currently has a balance of $75 million, down from around $220 million in early December; Wintermute has $122 million, compared with $1.7 billion last February and $4 billion at the end of October 2021, when the bull market reached its peak.

Amber Group, which jettisoned a sponsorship deal with U.K. soccer team Chelsea in December, has been through multiple rounds of layoffs. Arkham says it currently has a balance of $92 million, down from a peak of about $350 million in mid-2022.

This isn't necessarily a bad thing, said March Zheng, the co-founder and managing partner of Bizantine Capital.

“Crypto markets are cyclical in nature, but it needs stress test conditions like the last few months to prove its resiliency for the long term,” he told CoinDesk in a note. “New token issuance activity has been down, but it gives more opportunity for incumbent and top projects.”

Zheng points to developments in Hong Kong as bullish sentiments for the market.

Meanwhile, the market continues to rally, with bitcoin pushing past $24.5K during Asian business hours Thursday while shorts were hit with considerable liquidation losses.