Liquidity squeeze despite the imminent end of the Fed tightening cycle will continue to affect bitcoin quotes. Turning Hong Kong into a crypto hub for the industry could change that, according to the Blofin Academy.
“The tightening financial cycle seems to have ‘already ended’ to some extent, but liquidity pressure in the crypto market remains difficult to alleviate in the short term. Fortunately, in the afterwaves of the ‘post-rate hike era,’ Hong Kong is emerging as an important source of…
— Blofin Academy (@Blofin_Academy) April 27, 2023
The specialists noted the risks of a recession or a full-fledged crisis in the event of an excessive increase in the Fed’s key rate.
According to experts, the current premium of 4% on annual bitcoin futures reflects the expected reversal of the Fed’s monetary policy. Sentiment in the crypto derivatives segment ranges from neutral to optimistic, in contrast to the situation in 2022.
The rise in digital asset prices in recent months has given the impression that investors are ready to move beyond the interest rate cycle. At the same time, pressure on liquidity has not eased yet, experts warned.
Amid regulatory pressure, BTC/USD trading volume hit a new low since 2021. The liquidity of other instruments paired with Bitcoin has remained at a low level since October 2022. It never recovered from its sharp fall in March.
Analysts dismissed the widely held belief that the collapse of SVB led to increased purchases of cryptocurrencies and an improvement in their liquidity situation as a misconception. Most of the trades at this point were for risk hedging purposes, but not for future trading. As a result, the coins went into long-term storage, reducing the available supply, they explained.
The reduction in the supply of stablecoins observed since April 2022 is noteworthy. The trend was formed under the influence of the collapse of Terra, the bankruptcies of 3AC and FTX, which became a sign of the loss of investor confidence in the crypto market.
“Liquidity is being transferred to fiat, which leads to a decrease in the valuation of digital assets. This situation is called passive deleveraging.”the analysts explained.
Regarding the prospects for improving the liquidity of the crypto market in 2023, experts indicated three different sources:
- return to risk appetite;
- hedging in connection with the banking crisis;
- hedging due to geopolitical conflicts.
Analysts noted that only the first component is sustainable, while the second leads to hodling, and the third has a relatively small volume.
The qualitative improvement in the situation with liquidity at the Blofin Academy is associated with a change in the macroeconomic cycle, and due to its dominant share in USD, with the policy of the Fed.
According to analysts, the rate cut by the Fed should be expected no earlier than September. Up to this point, the market may feel the pressure of reduced liquidity.
In this regard, experts see the prospect of strengthening the role of traders from Asia against the backdrop of improving the regulatory landscape in Hong Kong. As a result, the influence of the United States on the cryptocurrency market may weaken.
“It is clear that Hong Kong has the potential to become a new driver. Capacity „stable coins” in HKD can compete with USD. Jurisdiction authorities expressed support for trading platformsthat use the local currency. The basis of liquidity can be stablecoins in USD and HKD. As the bull market develops, the role of Hong Kong will increase.”the company explained.
Recall that in January 2023, the Financial Secretary of the Special Administrative Region of China, Paul Chan, announced the readiness of the jurisdiction to accept crypto startups from all over the world.
Earlier, Circle CEO Jeremy Allier called law enforcement actions the main factor in reducing USDC capitalization. The top manager did not rule out the US losing its leading position in the sector in favor of the EU, Hong Kong and the UAE.
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