By Kyle, Investment Manager@Bing Ventures

For the current market, the most important thing is to survive to see the new moon after the crypto tide.

This past October, BTC’s monthly moving average briefly held around $20,000. It was also one of the quietest Octobers on record for Bitcoin. The whole cryptocurrency market has maintained a volatile trend for quite a long time. And the market created by this volatility is also vulnerable to unstable news, which can cause the balance to upset.

At the end of October, however, there were signs that this equilibrium was breaking down. The rebound that the bulls have been craving looks likely to continue. But that possibility was dashed again with the FTX Black Swan event. The latest US CPI data fell back to the “7 range”. Risk assets other than cryptocurrencies are rallying violently again. Under such a complex internal and external environment, how will BTC trend?

The Allegory of the Catfish Effect and the philosophy of fluidity

Spaniards love sardines, but sardines are expensive to transport and poorly adapted out of the sea. When the fishermen bring the freshly caught sardines back to the dock, it doesn’t take long for them to die. And dead sardines could not be sold at all.

In order to prolong the life of sardines, fishermen will try to keep the fish alive to reach port. Then the fishermen figured out a way to put a few catfish in a transport pod. Since catfish are carnivorous, they swim around in search of small fish to eat. To avoid being eaten by predators, sardines are forced to swim faster, keeping them alive.

As a result, fresh sardines will come to market alive and well. This compulsion to be activated by your opponent is known in economics as the “catfish effect.” Now the catfish effect has finally arrived in the cryptocurrency market. The FTX becomes the fat sardine being eaten by the giant catfish.

A lot of people are pessimistic about what’s going on right now, but in the long run this is one of the positive things that will happen to the crypto industry. The collapse of FTX followed the withdrawal of institutions and the release of risks. The catfish effect can activate the remaining crypto native projects, making these organizations completely rid themselves of superiority and dependence, and accelerating the transformation of the whole spectrum from concept transformation, legal structure, team management to token mechanism.

This deep liquidity shift should not just be seen as a slowdown in growth, but as a new source of demand.

A liquidity crunch that continues to build up

Let’s review the cryptocurrency market over the past month. First of all, from the macro perspective, on October 22, the president of the San Francisco Fed mentioned in an interview that the current rate hike pace is a little faster, the Fed will consider slowing the rate hike pace, but not a pause, but a 25 or 50 basis point hike.

Fed Governor Christopher Waller also said that as interest rates get higher, the stronger the case becomes for slowing the pace of increases while continuing to climb, to as low as 50bp. Perhaps the new data will show an even smaller climb of 25bp. Or it may take a series of 50bp hikes to keep rates rising for a while, eventually reaching a higher endpoint.

The comments instantly boosted speculation that the Fed would cut interest rates in December. US stocks bottomed out and led to a rebound in the crypto market. In fact, expectations had been for a 75 basis point hike in December. But the Fed raised rates by 75 basis points for the fourth time in a row and the sixth time this year. Mortgage rates, meanwhile, are rising to a 15-year high of 7.5–9%. Mr Powell sounded a more hawkish note: Even if inflation falls, it will not stop raising rates, and the actual rate increases will be higher than the market expects.

Is this suicidal rate hike by the Fed really dispelling the illusions of investors around the world? Investors still seem to be swinging back and forth, unwilling to accept the current monetary tone. Especially in the face of the economic freeze paradigm in the current high-inflation environment, investors are still repeatedly trying to create a dovish outlook through the illusion of recession suppression. Reflecting the performance of the market, investors have already priced in and predicted a 75 basis point increase, the overall risk market volatility remains in a small state.

But expectations are made to be broken. It is still in the second phase of cumulative tightening. Although inflation is falling and interest rate rises are expected to be smaller, the Fed is determined to inflate American house prices and share prices, while harvesting other economies with dollars.

So it is not ruled out that Powell will continue to play the big game after the midterm elections stabilize. Therefore, crypto investors cannot rely on the Fed to lift up and fall down gently. The ultimate landing point is still the risk aversion of funds on the floor. At present, under the FTX incident, the floor funds around Bitcoin show a positive and firm state.

FUD or BUILD?

Secondly, in terms of news, as Musk officially completed the acquisition of Twitter at the end of October, rumors spread that Twitter would carry out blockchain transformation and integrate crypto payment instantly, which made altcoins represented by DOGE soaring one after another and greatly improved the money-making effect of altcoins in the field. This also provides a good catalyst for the cryptocurrency rally.

In addition, due to the deterioration of the overall international macro market, short sellers have been increasing their bets on the decline of the cryptocurrency group during the whole month of October. Futures long — short ratio maintained near 1 in the long — term. With the shorts heavily oversold, massive short liquidation has been the catalyst for the rally. Therefore, the market rise at the end of October also exists the main premeditated strangulation shorts may.

Unfortunately, the rally was again blown away by the FTX Black Swan. Alameda Research, a sister company also founded by SBF, whose balance sheet is dominated by FTX-issued FTT tokens, holds about 140 million and controls 70 percent of the 200 million FTT tokens in circulation. According to a CoinDesk report on Wednesday, Nov. 3. Alameda had $5.8 billion in assets related to FTT, accounting for 88% of its net assets. The Revelations raised concerns among investors about Alameda’s health and the potential for a liquidity crisis at FTT.

Binance, FTX’s biggest rival, immediately questioned the issue on November 5th. On November 6, Alameda Research co-CEO Caroline Ellison finally responded on Twitter, saying that CoinDesk’s disclosed balance sheet is only a portion of the company’s assets, with more than $10 billion in assets not reflected. It says it has repaid most of the money. SBF also announced that operations were normal. But then there was a flood of FTT on the blockchain. Users began withdrawing money from FTX on November 8, and hardly anyone deposited any. FTX suffered a liquidity gap of about $8bn.

The timing of the rally

Unable to gain the help and trust of institutional funds, FTX officially went bankrupt. The black swan has finally arrived. The most important is the blow to confidence. Rebuilding lost trust will be the biggest challenge. The second is the arrival of more stringent crypto regulatory enforcement. The crypto market will leave behind the era of extensive development with superficial regulation. Crypto asset managers in each country will generally implement a set of strict risk control systems and complete audits. But incremental regulatory involvement is the way to cause the least friction and damage to the industry.

It is conceivable that a vicious incident such as the FTX would invite regulation that is one-sided and malevolent. Once the correction is overdone, it will cause irreparable consequences to the industry. At the same time, continued rate hikes are extremely negative for the cryptocurrency market, which has seen a high positive correlation between stocks and risk assets such as cryptocurrencies since the beginning of 2022. The crypto market has been in “cold winter” mode for an extended period of time as investors have fled amid rising interest rates, soaring inflation and a potential recession.

The price of most of the tokens fell sharply. Most cryptocurrency traders are still waiting for further signals of a bottom. And as talk of a global recession grows, the focus has shifted to when the Fed will cut interest rates. Once the Fed starts to show any signs of easing policy, this will be a strong short-term positive for cryptocurrency assets.

Inflation and Labour market data in the coming months and quarters are therefore crucial. If the 2 per cent target is not met, the cloud of a rate rise will continue to hang over the market. Combined with the current FTX debacle, the expected rebound may be delayed until the first quarter of next year. Of course, don’t base your expectations on policy shifts; they should be based on technological innovations. The only thing we can expect is that the global spillover from higher interest rates is coming back to bite those fragile fiat units.

Can only dollar pools carry liquidity? The answer is clearly no. Can the Bitcoin network’s hematopoietic and blood-sucking abilities be tested more? The answer is clearly yes.