The difficult topic of whether cryptocurrency has bottomed out or if there is yet another leg down on the horizon is addressed by Nansen analysts.
Since their all-time highs, cryptocurrency market valuations have fallen sharply, with the whole market capitalization shedding $2.2 trillion, or around 73%, from its peak.
Industry participants are frantically trying to predict when the price will bottom out because many altcoins, including ones with huge market caps, have lost over 90% of their value since their all-time highs.
In light of the aforementioned, the crypto analytics resource Nansen recently published a paper that detects systematic trends in traditional spot markets and crypto derivative markets and analyzes their implications for the present market situation. In other words, they are trying to determine whether the crypto bear market is nearing its end.
Nansen lists three important conclusions.
American Dollar
As at the moment these words are being written, the USD has begun to deteriorate versus other important currencies like the JPY and the CNY.
According to Nansen, one of the factors causing this could be how future bond markets price the peak Fed interest rates.
"According to bond futures, the Fed policy rate will peak at around 4.84% in May 2023 before dropping by 40bps or more in the second half of that year. It's true that the US CPI data have surprised to the downside for two months running, which may contribute to some of the pricing out of rate increases. The report is read."
However, rate reductions may occur if the US exhibits significant macroeconomic weakness, with real GDP sharply decelerating. Jerome Powell, the chairman of the Federal Reserve, has stated numerous times that the labor market needs to be rebalanced and that the "risks of under-tightening exceeded the risk of over-tightening."
Nansen calculated the relative growth between the US and other factors using complicated metrics and arrived to the following conclusions:
"... the underlying case for the bottoming of crypto assets is probably not there yet. It is perhaps too early to call for a transition to easier global financial circumstances."
The analysts now turn their attention to the derivative markets.
Puts vs. Calls for ETH and BTC
In order to address the question of whether option holders in BTC and ETH have already given up, Nansen looks at the open-interest-weighted implied volatility of call vs. put options (CPIV).
They base their analysis on data from January 2021 to November 2022, assuming that the derivative market will develop in subsequent cycles.
The following is a summary of the conclusions they reached:
- Compared to the stablecoin indicator, the CPIV indicator was able to produce more frequent risk-on and risk-off alerts.
- The multi-month BTC slump that began in November of last year was mentioned by both of them.
- While the CPIV indicator remained risk-off as of November 20, 2022, the stablecoin indicator returned to risk-on in May 2022.
Blockchain Risk Premium
The experts develop and determine the Crypto Risk Premium, or CRP, a risk premium for cryptocurrencies in the report's final part. It is connected to the underlying value of the cryptocurrency assets that investors own.
Ian Martin created the approach used by the analysts in a paper titled What is the Expected Return on the Market? that was released in April 2015. In addition, Nansen makes advantage of Deribit's historical options data, taking into account the intraday bid and ask prices for calls and puts on BTC, ETH, and SOL.
However, the experts caution that because the equities options markets are older and more well-researched than the cryptocurrency derivative markets, it is important to keep an open mind when examining CRP projections.
With that said, the inference (more of a guess) is that:
"...the ERP is expected to go significantly higher in the event of a US recession and a sell-off in US equities, which is our major scenario for 2023 given the Fed's intention to keep lending standards tight for longer, and conversely, the CRP or crypto risk premium will probably also increase. Therefore, it's feasible that before financing conditions improve for both equity and crypto assets, crypto prices undergo one more (and "last"?) leg down in current cycle."
Disclaimer: The author's personal view may be included in the information, which is subject to market conditions. Before making a cryptocurrency investment, do some market research. Your individual financial loss is not the responsibility of the author or the publisher.
