January market analysis

January appeared to be a tough month not only for crypto but for the whole market as well. According to Coinmarketrate.com, on January 24th BTC fell to $33K, and then it recovered and returned back to the level of $40K. Ethereum  fell from $3257 to $2219 in just four days. Another sharp fall was observed since January, 20th.

In this month’s review, we will look at the factors that caused the sharp drop in the market, the rules for regulating cryptocurrencies that were discussed in Congress, and the persecution of the founders of DeFi and Bitcoin miners in the United States. Finally, we offer an analysis of how NFT found a way out of the red zone this month.

Correlation with traditional markets

Throughout history, Bitcoin and the broader cryptocurrency market have maintained a lower correlation with the stock and bond markets. However, the current turbulent macroeconomic situation has created uncertainty in the markets and reduced risk appetite, as a result of which the correlation of Bitcoin with the technologically heavy NASDAQ index has reached a new historical maximum, thanks to several events.

Blockchain Analysis

January ended with the Fed leaving interest rates unchanged for now. However, Bank of America expects the Fed to raise rates seven times this year to contain inflation. This has led to further skepticism about risky asset classes, which is reflected in the already rising interest rates on US Treasury bonds, which mean a transition to safer securities.

This shift to lower risk could benefit stable coins like the USDC, whose market value has reached a historic high of $50 billion.

Considering all the factors, it’s hard to say to what extent Bitcoin will collapse. The ratio of net unrealized gains and losses has proven to be a good indicator of market sentiment in the past. If it falls below 0.2, it may cause even more fear and surrender, but now it is above 0.3.

We have seen the market fall after the pandemic, and then rise again, breaking new records. The market is stable, given the pace of innovation and key macroeconomic factors that attract talent to this industry:

• 65% of all active developers came in 2021
• The big wave of retirements that we are seeing in the US is moving from tech giants and traditional banks to cryptocurrencies / web3

CBDC in the USA

Tom Emmer, the Congressmen, introduced a bill on January 12 that would prohibit the Federal Reserve System from issuing central bank digital currency (CBDC) directly to individuals. This happened right after China announced that it would test its digital yuan at the Winter Olympics in Beijing.

Emmer argued that the CBDC issued by the Federal Reserve not only centralizes Americans’ financial data, making them vulnerable, but can also be used as a surveillance tool. In order for the Fed to issue a CBDC, it needs Congressional authorization. Emmer argues that opening an account with the Fed to access the American CBDC will lead the Fed on an insidious path similar to Chinese digital authoritarianism.

The Federal Reserve has been considering CBDC for some time, and has been cautious on this issue, but has not made an informed judgment. On January 20, the Federal Reserve released a long-awaited document with an analysis of the CBDC and listing several pros and cons for it, from the point of view of the department. The document does not contain decisions or hasty political conclusions, but invites the US public to speak out on more than 20 controversial issues.

Regulatory and legal changes

On January 26, the U.S. Securities and Exchange Commission (SEC) announced proposed rules aimed at better protecting investors and improving cybersecurity by bringing more alternative trading systems (ATS) trading government bonds and other government securities under the umbrella of regulation.

The SEC plans to propose a number of changes to the 2020 idea, taking into account the public comments received in response to this proposal. This, in fact, will extend regulation to systems that provide protocols for combining buyers and sellers to trade any kind of securities.

These communication protocol systems will have to register as exchanges or broker-dealers and comply with the ATS rules.

However, SEC Commissioner Hester Pierce, known as crypto mom, disagreed with this. In a dissenting opinion published on the same day as the SEC announcement, she expressed concern that the 30-day comment period provided to the public was very short, given the fundamental changes being discussed for the $22 trillion treasury services market. She argued that 90 days would be more appropriate.

Pierce, who is known as a defender of the crypto community at the SEC, also expressed concern about the requirement to change or expand the definition of “exchanges.” In her opinion, this may hinder innovation and discourage new participants from entering the market of trading platforms and execution services.

Reaction to the new bill

On January 25, the White House submitted to Congress a bill called the COMPETES Act, which, according to US President Joe Biden, is aimed at strengthening US supply chains and reviving the innovative engine of the country’s economy in order to get ahead of China and “the rest of the world” in the future.

The American analytical center Coin Center indicated that the provision included in the law should be revised, since it “gives the Treasury a blank check for banning cryptocurrencies on exchanges.” The executive director of the Coin Center, Jerry Brito, claimed on Twitter that these provisions will expand the list of things that can be banned by the Minister of Finance to include “certain transfers of funds”, and will cancel all requirements for public notification and comments, as well as a 120-day period during which measures can be introduced without regulation.

On January 31, Brito announced that Congressman Jim Himes had agreed to exclude this provision and that a decision would be made later this week. Although the amendment is still under consideration, it confirms the thesis that community initiatives such as the Coin Center are crucial to guide regulators and correct their misconceptions in order to protect the crypto industry and help it succeed.

Continuation of repression

On January 23, Uniswap founder Hayden Adams announced that the bank, JPMorgan Chase, had closed his accounts without notifying him or explaining the reason for the closure. Adams said that he knows other people who also work in the crypto industry and have experienced the same.

In his response to Adams’ tweet, Brian Kintenz, former chairman of the US Commodity Futures Trading Commission (CFTC), said that most likely it was about “shadow debanking of cryptocurrencies” by the Federal Reserve or the Office of the Comptroller of the Currency. Quintenz, who is now a consulting partner at Andreessen Horowitz, argued that a bank that terminates a relationship with a client on the recommendation of a banking expert is not contractually obligated to inform the client of the reason.

There are also the first signs of restrictions on bitcoin mining in the United States. On January 29, the New York State Department of Environmental Protection notified bitcoin mining operator Greenidge Generation that it had postponed a decision on whether its power plant in the city of Dresden could continue to be used for bitcoin mining.

On January 28, Senator Elizabeth Warren targeted six Bitcoin miners, namely Riot Blockchain, Marathon Digital Holdings, Stronghold Digital Mining, Bitdeer Group, Bitfury Group and Bit Digital, questioning their “extremely high energy consumption” stating that the problem is not how environmentally friendly mining is. We have seen how miners have also been attacked when they used renewable energy in Europe. Unfortunately, the problem remains very ideological. Currently, we are seeing an outflow of miners to more cryptocurrency-friendly countries, such as Canada, El Salvador or Switzerland and Iceland.

NFT on the rise

A number of macroeconomic events have shaken the markets in recent weeks and months, and the correlation between cryptocurrencies and traditional asset classes, especially the technology sector, reached a historic high during the recent sell-off. Although the prices of most assets have fallen, there is one sector that continues to thrive – NFT!The number of search queries in Google for the keyword “NFT” recently exceeded the number of queries for the term “cryptocurrency” for the first time, which demonstrates the constant interest and attractiveness of this asset class for a wide audience. Moreover, it seems that individuals may view the current downtrend of Ethereum as an opportunity to buy NFT, as the number of individual buyers continues to grow.

There have been several positive developments, for example, Twitter has started NFT integration of verified profile photos, Walmart’s recent trademark application, as well as the entry into the Bored Ape Yacht Club (BAYC) of celebrities such as Justin Bieber, Kevin Hart, Neymar Jr. and others.

Interestingly, the minimum price (also known as the “floor”) of the BAYC avatar project increased significantly in January – by almost 70% from 65 ETH to more than 110 ETH. Although the value of the base ETH cryptocurrency has fallen by 25% compared to last year, the minimum fee price in US dollars has increased by 20%. Ultimately, this suggests that first-class NFT projects can become an asset class that acts as a new store of value, similar to art.

Another confirmation of this was the news that Genesis, a digital asset trading company, has started accepting NFT as collateral for loans and derivatives. This suggests that digital art has found its way into the growing market of complex crypto-financial products.

Finally, LooksRare, a decentralized NFT marketplace that directly competes with OpenSea, continues to attract OpenSea users to its platform. As follows from the data, LooksRare managed to capture almost 70% of the total market share within four weeks. Overall, the NFT sector continues to innovate and attract new users, content creators and companies, and its growth is likely to continue this year.