Coinbase: Why the recent crypto market decline

Source: Coinbase; Compiled by Golden Finance. Coinbase believes that this week's macroeconomic data has weakened market expectations for significant rate cuts, leading to a stronger dollar and tightening financial conditions. The Bureau of Economic Analysis (BEA)'s third advance estimate raised the second-quarter US GDP growth rate to 3.8%, suggesting stronger underlying demand than previous data had suggested. Meanwhile, durable goods orders rebounded 2.9% month-over-month in August (excluding a 0.4% increase in the transportation sector), while core capital goods orders (a key measure of business investment) rose 0.6% month-over-month. Initial jobless claims fell to 218,000 that week, indicating a weakening labor market, but not as much as previous data had suggested. Taken together, we believe these data suggest stronger-than-expected economic growth and labor conditions, reducing the likelihood of rapid monetary easing amid persistently high inflation. Markets appear to be pricing in this shift: interest rates edged higher, the US dollar index neared a three-week high, US dollar liquidity tightened slightly, and cryptocurrency prices retreated. From a more global perspective, Coinbase's custom M2 Liquidity Index suggests liquidity headwinds will emerge starting in November. Our custom Global M2 Liquidity Index (which optimizes money supply growth and leads Bitcoin by 110 days) has shown a downward inflection since November. Given that the index has a correlation of approximately 0.9 with BTC over timeframes of one month to three years, we believe the inflection point likely signals liquidity headwinds heading into year-end (Figure 1). However, the index also suggests healthy liquidity conditions in October, which could support risk assets in the short term. Figure 1. M2 Liquidity Index Projected to Decline in Early November. Beyond macro factors, we believe this week's cryptocurrency liquidations are driven by positioning pressure, which has been building for several weeks and raises red flags. As discussed in our previous article, altcoin open interest dominance is well above the 1.4 threshold, which typically signals large-scale liquidations. Last weekend, the ratio reached 1.7, following which we saw approximately $1.8 billion in forced liquidations of long positions as long positions were liquidated across the market (Figure 2). Even after these liquidations, the ratio remained elevated at 1.6, which we believe highlights the need for cautious positioning ahead of upcoming data releases that could impact interest rates and the US dollar. Figure 2. Altcoin Open Interest Dominance Ratio