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Over the past month, overall inflation in the United States has been trending downward, and the labor market's heat is subsiding. The US macroeconomy is moving towards a soft landing, and the adjustment of US stocks is relatively manageable. There don't seem to be any unexpected factors on the horizon. The Fed's interest rate hikes are coming to an end, with the possibility of one more hike, but its impact is diminishing, no longer the primary focus of the market.

Chart: The US CPI has been trending downward

However, the key issue for the cryptocurrency market is the high-interest rate environment. Recently, both the 10-year US Treasury yield and DXY have been rising, putting significant pressure on risk assets. In a high-interest rate environment with ongoing balance sheet reduction, risk assets are struggling to perform well. Due to the strong performance of the US economy, the Fed's determination to combat inflation remains firm, and rate cuts may still be some time away. The Fed may not start cutting rates until the third quarter of next year, and investors need to remain cautious and patient.

Chart: The 10-year US Treasury yield hits a new high

Retail investors are running out of excess funds. During the pandemic, the US government provided a substantial amount of fiscal stimulus to residents, boosting not only the economy but also directing a significant amount of funds into the financial markets, inflating bubbles in small-cap stocks and cryptocurrencies. However, as time has passed, excess savings among US residents have gradually declined. The Federal Reserve Bank of San Francisco predicts that excess savings among residents will be exhausted by the third quarter of 2023, which will have an impact on the economy, inflation, and employment. The United States is one of the world's largest economies, and with excess savings among its residents nearing depletion, it indicates that retail investors are running out of excess funds, making it difficult for the capital markets to replicate the performance of a bull market.

Chart: The excess savings of US residents are running out

Institutional investors are also becoming more cautious. So far this year, institutional investors have been reducing their investments in the cryptocurrency market, with primary financing significantly lower compared to the previous two years. In August, financing amounted to only $283 million, essentially returning to the levels of 2019-2020. Even in the sharp market downturn of 2022, monthly average financing exceeded $1 billion. From a positive perspective, the market is completing the process of deflating the bubble, which is very similar to the characteristics of the bottom of the previous market cycle.

Chart: Since this year, the primary financing in the cryptocurrency market has seen a significant decline

Overall, there is a lack of favorable changes in the macro environment. The Fed maintains a relatively hawkish stance, and rate cuts may not occur until the third quarter of next year. Retail investors are running out of excess savings, institutional investors are becoming more cautious, and the market is unlikely to see a major rally. Instead, it is more likely to experience a period of consolidation and investors need to remain patient. Specifically, when the market drops to its lows, we should not be excessively pessimistic, and when the market rises to its highs, we should not be excessively optimistic.

Crypto: Liquidity Shortage, Altcoins Deflating the Bubble

The ETF narrative has subsided, and the market has entered a stalemate. The news of a Bitcoin spot ETF stimulated the market's rise at the end of June, but the SEC's decision to delay it in August led to a comprehensive retreat of the bulls. According to Bloomberg analysts, the first ultimate deadline is January 10th for Ark, and the SEC may postpone the final decision until the end of the year, which is 3-4 months away from now. It is currently challenging for this to become a factor driving the market higher. Although the news of Grayscale's victory temporarily boosted the market, BTC failed to regain its position above the 120-day moving average, and the gains were completely wiped out just two days later, leading the market back into a stalemate.

Chart: BTC is consolidating below the 120-day moving average

Trading volumes are declining, and interest is weak. Since BTC and ETH began to consolidate in mid to late July, trading volumes have significantly decreased, and trading interest in the market is quite low. Currently, BTC's total trading volume is approaching the level it was at after the FTX liquidation event. Both buyers and sellers are in a wait-and-see mode.

Chart: BTC's total trading volume is approaching the level it was at after the FTX collapse

Insufficient funds in the market, altcoins are deflating the bubble. Apart from BTC and ETH, the total market capitalization of cryptocurrencies has approached the bottom range of June, and altcoins are continuing to show a downward trend. XRP has completely erased the gains it made after winning the SEC lawsuit, and ARB has fallen below its June low, with only a few low-cap altcoins experiencing Pump & Dump rallies with the participation of market makers. Former on-chain star projects like UNIBOT, BITCOIN, and OX have seen even larger declines, indicating a lack of market funds and confidence.

Chart: Crypto total marketcap excluding BTC and ETH has approached the bottom range of June

Overall, funds are flowing from altcoins to BTC, and altcoins are completing the process of deflating the bubble. Compared to the lows earlier this year, BTC still has an increase of around 60%, while many altcoins have turned negative in terms of returns. The market is gradually digesting the overvaluation of many altcoins in a downward, low-volatility manner, completing the final consolidation phase of the bear market. The market has adjusted to lower levels, and there is limited downside potential. In the absence of major negative news, the decline brings opportunities rather than risks.

What We Are Bullish About

Short-term: BTC is expected to consolidate between $25,000 and $30,000. Given the current situation, there are no significant macro changes, and there are no clear bullish or bearish factors in the market. BTC is highly likely to consolidate within the range of $25,000 to $30,000. Currently, market sentiment is overly pessimistic, and impatient investors have exited their positions. The deflation of altcoins' bubble is largely complete, and a casual rally doesn't require a significant amount of capital. Even a recovery rally has the potential to push BTC back to around $30,000.

Chart: The current market sentiment is overly pessimistic, and there is a possibility of a relief bounce

Medium-term: The Fed's interest rate hikes are coming to an end, waiting for rate cut trades. Looking back at the previous interest rate hike cycle, after the Fed paused interest rate hikes, BTC bottomed out and rose sharply from $3,300 in February to $13,000 in June. Markets often anticipate the Fed's rate cut, and by the time the rate cut is implemented, a significant uptrend may already be well underway. While it may be too early to talk about rate cuts at the moment, we are very close to the final interest rate hike, and the future market outlook is promising.

Chart: After the Fed paused interest rate hikes in 2019, BTC bottomed out and rose sharply

Conclusion

Short-term BTC holders are selling their final bags at $26,000, while patient investors see extraordinary opportunities. We maintain a cautiously optimistic stance on the current market, while also having a positive outlook for $BTC next year. Remain patient and seize buying opportunities during downturns.

Disclaimer: The information and data presented in this article are obtained from public sources, and Tide Capital makes no guarantees regarding their accuracy and completeness. Any predictions, speculations, or opinions contained in this article are statements about future events and may differ significantly from actual results due to limitations in data timeliness, assumption validity, uncertainty factors, and unforeseeable risks. Any advice and opinions in this article are for reference purposes only and do not constitute recommendations to buy or sell any digital assets. They do not constitute investment advice or solicitations. The strategies that Tide Capital may adopt may be the same, different, or unrelated to those inferred by readers based on this article. Investors should carefully consider any decisions and seek appropriate legal and financial advice when necessary. Any misunderstanding or misuse of the content in this article does not constitute the responsibility of the author or the publishing institution.