This week, the cryptocurrency market was once again affected by the pressure of the Fed's interest rate hike policy. The price of Bitcoin was revised down from US$24,000 to US$23,000. The correction was not significant. In addition, the current market capital momentum is not bad, and many small and medium-sized cryptocurrencies have begun to show higher prices. There have been significant price fluctuations and the overall market trading volume has rebounded. However, the most important event this week was Coinbase’s announcement on Thursday of the launch of the Ethereum Layer 2 Network called “Base”.
This L2 network project was developed using Optimism OP Stack. The price of Optimism tokens was the first to rise by about 21%, from US$2.6 to US$3.15, showing that the company's technology was recognized by Coinbase, and their new Ethereum Layer 2 The Internet was introduced to the market with the goal of being low-cost, efficient, and easy to develop.
Coinbase hopes to bring in more dAPP applications and users through this chain, and create a Web 3 platform within the Coinbase ecosystem. Simply put, it is a Layer 2 network that integrates all Coinbase's own products, and is completely open source. An ecological application APP that can be connected to the Ethereum main chain can be imagined as an L2 network that allows users to use Coinbase products at a lower cost.
This also means that Coinbase chose to bet heavily on the Ethereum ecosystem instead of developing a new chain on its own. As a precedent, it will attract other companies to choose Ethereum as a development platform for the blockchain ecosystem, which means there will be more applications in the future. The development was launched on the Ethereum L2 network. Users can also use this to pay lower fees for transactions. Only when they need to switch platforms, they need to pay higher transfer fees to the main chain nodes for processing, which represents Ethereum's global trend. Plans to build a computing network have taken another step forward.
But this has also become another wave of speculative funds. Even though Coinbase has already informed users that it will not issue new tokens, there are still many unknown cryptocurrencies that have skyrocketed, causing many people to rush to find which tokens can have names that can be linked to Base. With this word, let’s talk about the BUSD incident in the currency circle and the return of pressure from the Fed to raise interest rates, both of which are important factors affecting the price trend of cryptocurrency.
A. On February 20, the market value of BUSD dropped to US$13.4 billion, and capital outflows continued.
As Paxo stops issuing new BUSD, billions of dollars of funds are fleeing rapidly. The original BUSD still had a market value of $16 billion, and now only $13.4 billion remains. The equivalent of $2.6 billion in funds has flowed out of BUSD and flowed into USDT and other cryptocurrencies, during the same period, the market value of USDT grew from US$68.5 billion to US$70.4 billion, a growth rate of approximately US$1.9 billion. The remaining US$700 million may be exchanged for USDC, TUSD or directly purchased for Bitcoin.
Although most of the funds in the tree still flow into USDT, some funds flow into Bitcoin, which plays a role in supporting and increasing the price of the market. Assuming that BUSD funds continue to outflow, there is a high probability that it can provide strong financial support for the market. , currently BUSD still has 13.4 billion US dollars, and even 5% of the funds flowing into Bitcoin will have a buying power of 670 million US dollars.
Therefore, we believe that the price support of cryptocurrency will be quite strong in the short term. As the huge funds parked in BUSD are released to the market, a certain amount of buying power will be formed. Even if the proportion is not high, it will be of good help to the market. Recent investors You can feel more at ease about the market direction, as cryptocurrencies and U.S. stocks may move in the opposite direction.
B. On February 21, the theme of interest rate hikes once again enveloped the market, and the crypto market was independent from the US stock market.
Yesterday, U.S. stocks fell again due to the surge in U.S. bond yields. The Nasdaq index fell by 2.5%. The reasons include investors seeing that the 2-year and 10-year yields rose to 4.73% and 3.95% respectively, setting a new record in the market. After reaching new highs, Wall Street once again suggested that "the Fed will raise interest rates more than expected." As a result, the script of US stocks rebounding strongly and inflation peaking turned into "pressure to raise interest rates" in just a few days.
In contrast, cryptocurrencies appear to be much stronger. The price of Bitcoin is still at the level of 24,000 US dollars, and has not been much affected by the sharp decline in US stocks. The reason is also that it has successively received buying orders from funds released by BUSD, which has made the cryptocurrency market The current support is relatively strong, and investors don’t have to worry too much about cryptocurrencies performing the same plunge as U.S. stocks.
When it comes to financial stability, cryptocurrency chips and capital flows have long been much more stable. Unlike the ever-changing investment views in the U.S. stock market, inflation was at its peak a week ago, and now suddenly investors are paying attention to the pressure of the Fed to raise interest rates. , now the US stock market is like a real casino, far more speculative than cryptocurrencies.
C. February 22 Fed meeting minutes released: Terminal benchmark interest rate may be higher
The Fed released the minutes of its latest meeting. Board members agreed that the current inflation data is still too high compared to the long-term target of 2%, and that the labor market is still quite tight. The cycle of rising wages and prices will have a certain impact on inflation. Although the price index (CPI) growth has indeed slowed down in the past few months, the Fed needs long-term and effective evidence of price decline. Before that, it is necessary to continue to raise interest rates.
After this news, US stocks generally fell, and Bitcoin also fell from US$24,500 to US$24,000. More and more people believe that the Fed will raise the benchmark interest rate to above 5.25% and continue for more than a year, and US bond yields also rise. , and now the high interest rate environment has once again enveloped the market, causing the previous wave of strong rebounds to temporarily come to an end.
As a result, short-term funds have gradually withdrawn from U.S. stocks and cryptocurrencies. Small and medium-sized cryptocurrencies have experienced large declines. Investors are once again looking for the "correct terminal benchmark interest rate" to adjust the market's value assessment. However, we believe that cryptocurrencies After the FTX winter last year, funds that should have been withdrawn have already been withdrawn. Investors who will continue to buy Bitcoin will not care about the benchmark interest rate, so they will be less and less affected by interest rate fluctuations.
The market value of BUSD continues to decline, and it is necessary to observe the subsequent flow of funds.
Last week, the market value of BUSD was still US$14.5 billion. By Saturday, there was only US$11 billion left. In just one week, US$3.5 billion in circulation disappeared. As funds continue to flow out, this money will be exchanged for USDT and Bitcoin. For cryptocurrency, Ethereum and other cryptocurrencies, the drama of fund reallocation has brought considerable support to the cryptocurrency market again. Just like the USDT decoupling incident caused Bitcoin to surge several times, if something happens to stablecoins, funds will be the first to flow out. Take refuge in Bitcoin.
Therefore, it is currently a better choice to place funds in Bitcoin. At present, we can still rely on the buying of BUSD fund reallocation to withstand the weak performance of U.S. technology stocks, and will not be too affected by the pressure of another surge in the ten-year U.S. bond yield rate. , the price of Bitcoin remains relatively stable between US$23,000 and US$24,000.
Although it seems to support currency prices in the short term, it is only in the short term. The tightening of stablecoin supervision is still a big problem for the encryption industry, especially since BUSD is regarded as a security this time. For a long time, no one has regarded the issuance of stablecoins as a security. "Securities sales behavior", for example, Circle CEO Jeremy Allaire believes that stablecoins should not be regulated by the SEC, but should be implemented by another regulatory agency related to banks, because stablecoins are essentially more like the reserve behavior of financial institutions. A function of the banking system.
Next is the Fed's interest rate hike policy, which triggered the market to no longer believe that the key to slowing inflation was the astonishing increase in the personal consumption expenditures (PCE) price index announced yesterday, which reached 5.4% year-on-year, much higher than the market expectation of 5.0%. It was too early to say that inflation has slowed down, let alone interest rates, so the market began to revalue interest rates. The current ten-year government bond yield has risen to 3.95%, and the two-year government bond yield has reached 4.8%. , approaching a recent high.
Judging from the current economic data, both the price index and the job market and other indicators show that inflationary pressure in the United States still exists, and inflation growth has only slowed down. However, we believe that the annual inflation rate will quickly drop to 3% in the second half of the year. It's just that the market is afraid that the terminal interest rate will rise beyond the original expectation of 5.25%. The slowdown script has not changed, and Bitcoin can still challenge US$30,000 this year.
Review of last week [MICA RESEARCH] Bitcoin rose above $24,000, is the crypto market about to come back?
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This article [MICA RESEARCH] The PCE index was strong in January, and concerns about the Fed raising interest rates returned to the market. First appeared on Blockchain.