Through the Fire - Will the Rubber Meet the Road?

We’re getting closer to the point where the rubber will meet the road. We’ve written plenty on the bull case for BTC and crypto, and that hasn’t changed.

Crypto prices are still tracking our expected cycle trend, and the next big test is whether we see another period of consolidation — or if the breakout we’ve been waiting for is finally near.

The need for more liquidity is only going to become more apparent, and with volatility in sovereign bond markets picking up, the jump in long duration yields is going to put pressure on the system. The dollar is trading at a key inflection point, and any further strength threatens to accelerate the financial tightening that’s already begun.

The race is on as to whether these risks will manifest into something bigger before policymakers intervene with more liquidity support. Market crises are non-linear events, and while we aren’t quite there yet, the risk of “something breaking” has only increased in recent weeks.

We outline a few notable risks in the near term that may stand in the way of the next uptrend, including the need for a catalyst to boost liquidity and demand in a struggling crypto market.

We don’t see these risks as long-term trends, however. We view any downside volatility as an opportunity to increase exposure at even better entry prices.

We don’t expect this window of opportunity to stick around forever, because as we’ve seen in the past, once the engines start firing, this market tends to move quickly.

The End Game thesis is starting to play out in real time.

Crypto Market Activity Remains Tepid

It’s that time of the cycle again — when the initial hype of a recovery rally fades only to be replaced by general apathy towards the crypto market.

August through September is an unusually tough period for crypto. And so far, BTC has traded in line with its past performance over the last two months.

Bulls will point to a brighter outlook for Q4, which yields better results on average…

But averages can be deceiving. Most of these Q4 gains occurred in BTC’s earlier years, except for 2020’s stimulus-driven rally.

We’ve seen many painful Q4s over the last five years.

And the November-December period is typically when the bulk of these drawdowns occur.

In its current form, one of crypto’s major selling points is speculation, making price the ultimate arbiter of onchain trends. As price goes, so does network activity.

Price drives onchain trading volumes…

It drives active user trends for DeFi trading apps…

It drives volumes and interest in NFTs…

This isn’t just an Ethereum trend, either. NFT volumes on other major chains like Solana are also diving.

Lower prices and lower volatility have sucked the juice out of crypto markets, taking onchain activity with it.

Trading volume across all chains has now dropped to levels unseen since DeFi Summer (2020).

And offchain volumes are no different. CEX spot volumes are down 93% from their 2021 peak.

Stablecoin usage is rolling over as less speculation means less trading and demand for borrowing.

With few trading opportunities, many holders have parked their capital in liquid staking protocols – the amount of ETH staked with Lido has continued to rise despite ETH’s lackluster price action.

Meanwhile, market breadth remains unenthusiastic.

Retail interest has faded, and many participants have fled to greener pastures.
In Ghosts of Cycles Past, we noted that now is the time we’d expect price consolidation, if not