Despite the ongoing crypto market downturn, which fuels concern among many industry observers, an increasing number of developments suggest that a new bull market could be closed, according to a recent analysis by crypto asset trading company Cumberland.
“After a very busy month, price action is consolidating. Given the nature of crypto and the tectonic shifts occurring beneath it, we do not expect this paradigm to last,” the firm said in a Twitter thread presenting its forecast for the crypto markets.
“There are plenty of sources of concern for market participants – volumes and liquidity have dried up and are, by various metrics, on the lows of the year,” according to the firm.
“While this could be a holiday phenomenon, sentiment is dark – dozens of crypto companies are either severely curtailed or out of business, and the future of the industry is as cloudy as ever. That said, prices have reached a surprisingly buoyant equilibrium which is well off the lows of the year.”
Cumberland believes that exploring this dichotomy is crucial to predicting crypto price action. The company’s analysis suggests that, following the euphoric highs reached in 2021, crypto markets spent a large share of this year “realigning with more sober technology valuations.”
The subsequent collapses of the Terra stablecoin and major crypto exchange FTX acted as accelerants of this trend, removing oxygen from the crypto lending markets and pushing liquidations into a vacuum, according to the trading firm.
“In the wake of billions of dollars worth of those liquidations and trillions of dollars of lost market capitalization, the next leg of price action is almost entirely dependent upon the question of whether or not there are further firesales to come,” Cumberland said.
While there remains a number of portfolios under the purview of bankruptcy administrators, and those crypto assets will need to be injected back into the market in the coming months and years, “it’s becoming increasingly evident that in most scenarios, the market is actually facing a deficit of crypto, not a surplus,” the company added.
Collapsed businesses such as FTX and linked firm Alameda Research, as well as various insolvent lenders would not have filed for bankruptcy if they had not already sold their liquid assets in a last resort effort to avoid Chapter 11 proceedings and stay afloat, as suggested by Cumberland.
“In other words, you don’t go bust if you have tradeable coins left to sell. Perhaps what we saw over the past few months was the wholesale liquidation of those coins,” the firm tweeted.
In 2023, the sources of market recovery are expected to be linked to adoption, according to the analysis.
“Major technology companies with billions of users continue their onboarding blockchain technology. The volatility of this asset class has captivated the attention of the entire spectrum of investors – retail and institutional alike,” Cumberland said. “We do not foresee a prolonged paradigm of indifference and price stability. Instead, we foresee a spat of volatility while the market rewires itself and web3 business models recalibrate. This will be followed by an eventual up-trend.”
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