This week was a rather dull trading week for the crypto market. Affected by the regulatory pressure from the U.S. SEC, Bitcoin once fell below $25,000 to around $24,000, and the weekly decline subsequently narrowed to 3.5%. In addition, more main-chain tokens were delisted by crypto exchanges on the grounds that they were securities. These tokens were sold off by investors, especially institutions, with declines of 20 to 30%. Similarly, POS Ethereum may also be regarded as a security in the future, with a weekly decline of nearly 10%.

In terms of the overall economy, a new wave of price indices and Fed interest rate decisions were announced. Unsurprisingly, inflationary pressure continued to ease due to the high base period. Although the core price index's monthly growth rate was still high, the drop in energy prices significantly corrected the price increase. The overall trend was still towards slowing inflation. Many economists estimated that rents in the United States were falling, which would be reflected in the Fed statistical index in another quarter. By then, we would see a drop in rental prices, and the pressure for interest rate hikes caused by inflationary pressure would be eased.

Speaking of the interest rate hike cycle, this week the Fed also suspended interest rate hikes once in accordance with market expectations. In addition to the slowdown in inflation, the bank confidence crisis is what the Fed is more concerned about. In order to prevent more banks from falling into a confidence crisis, the Fed hopes to buy time to observe more economic data, so it decided to stop raising interest rates once. However, in order to avoid the restart of market inflation expectations, Chairman Powell also said in a public speech that there may be two more interest rate hikes this year, the amplitude will reach two basis points, and the benchmark interest rate will also rise from 5.25% to 5.75%.

In general, these general economic information revealed that the market will be under pressure in the short term, but inflation is expected to cool down in the fourth quarter, ushering in another wave of loose policies. However, there is still bearish pressure on cryptocurrencies in the short term, because the current market trading atmosphere is so bad that many traders hope to profit by short selling. This week, USDT decoupled again.

USDT suffered strong selling in DeFi liquidity pools such as Curve and Uniswap, causing the price to deviate from 1 US dollar and fall to 0.996 US dollars. This is because traders hope to create market panic by shaking the price of USDT, so they choose to use DeFi liquidity The pool created a price difference in an attempt to make other cryptocurrency prices fall. This time the effect was not significant because the attacker could not make the price difference exist for a long time and the price difference was not wide enough. Soon it was pushed up to $1 by other liquidity providers. But it did cause the price of Bitcoin to fall by about 2%, reaching the $24,000 range, but then rose back to $26,000.

Currently, the cryptocurrency market is affected by three major negative factors, resulting in a lack of interest from external funds, which are unwilling to enter the market to increase trading volume and make it difficult for cryptocurrency prices to improve. The first is "regulatory pressure", "AI concept stocks attract funds" and "rising expectations for Fed rate hikes". The latter two make it difficult for speculative funds to enter the crypto market, but we want to focus on when the funds will return to the market, because we see that the price of cryptocurrencies is still very resilient, and a sustained recovery is expected in the medium and long term.

AI concept stocks still have a halo, but capital inflows remain weak

First, let's talk about the regulatory environment and price resilience. If it is the crypto market in the past, the world's largest crypto exchanges have delisted a bunch of mainstream tokens or have been formally sued by regulatory authorities, and several small and medium-sized exchanges have reached a settlement with the SEC and announced their formal withdrawal from the US market, Bitcoin has always collapsed by more than 30%. But now Bitcoin has fallen by at most 5%, which is equivalent to about 1,000 to 2,000 US dollars. From this, we can judge that the market is quite stable and investors have not panicked. However, this also means that there are currently no very cheap goods to pick up, which is a bit regrettable.

Crypto exchanges are also looking for ways to cooperate with the U.S. SEC. If the cost is too high, they can only withdraw from the U.S. market. The impact on crypto exchanges is actually not significant. As long as they are converted into currency-to-currency exchanges and do not involve fiat currency deposits and withdrawals or credit card transactions, they can still be handled. However, the negative atmosphere caused by the current regulatory pressure is not conducive to investors chasing prices and institutional funds entering the crypto market.

The second point goes back to the part where external funds lack incentives to enter the crypto market. First of all, AI concept stocks are still popular. Whether it is recent technology forums, exhibitions or new venture financing activities, they are all centered around AI applications. They are all discussing how to apply generative AI to create more advanced business models. The prices of related concept stocks have also had strong subsequent increases, much like when cryptocurrencies took off in 2021.

At that time, everyone was discussing the business model of Web3 and the Metaverse, but now the topic has changed to artificial intelligence, and another group of people have also started to discuss the topic. With the cryptocurrency craze no longer going on, speculative funds can only choose small and medium-sized tokens to enter the market for speculation, which will not have much effect on lifting the overall market. Assuming that AI concept stocks continue to convince investors that its future value does exist, the amount of speculative funds returning to the crypto market will be less, and they will all chase AI concept stocks. However, market funds are limited, especially in the current environment of gradually tightening high interest rates, and the supply of funds is very unfavorable to the crypto market.

The third point is that after the Fed's FOMC interest rate meeting this week, the market's expectations for interest rate hikes continue to rise, and it is believed that the Fed will raise interest rates by two basis points in the second half of the year. Compared with the previous optimistic expectations, there are many hawks. However, given the continued decline in the US rental index and the high inflation base, we can see an annual inflation rate starting with 2 as early as the fourth quarter of this year. It is only a matter of time before inflation slows down, which is also the main reason why US stocks continue to rise.

Finally, the Fed may cut interest rates in early 2024 or later. It will be more difficult to see a rate cut this year, so the short-term crypto market will still be limited in its price momentum by the high interest rate environment, but in the medium and long term, as long as interest rates are cut, prices will definitely recover. Therefore, investors must be more patient in holding cryptocurrencies. If there is a lower entry price in the short term, they can enter the market to pick up bargains. The current situation in the crypto market is really bad, and prices may continue to be weak in the short term. Investors must hold on through this low period and wait for generous rewards after the rate cut.

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