Notes 4/7: Low Volatility Bitcoin Price, Tether’s Inflated Market Cap

Labor department data released this morning indicated a slowdown in hiring markets, proof that the Federal Reserve’s interest rate hike regime is showing results. That should have been good news for cryptocurrency prices because it multiplied the odds that the agency might hold off on another quarter percentage increase at its next meeting and soothe investors nerves. They might even be tempted to put their money into risky assets.

But prices for major coins remained mostly flat this after the announcement.

Bitcoin price climbed to a high of $27,991.16 at 10:30 am this morning, still 1% below its high yesterday, before falling again. As of this writing, it is changing hands at $27,919.78, roughly unchanged from a day earlier, according to data from CoinDesk. Ether prices, which have been rallying in anticipation of the final stage of the Merge next week, charted a similar trajectory. They are unchanged at $1857.16. The overall market capitalization of cryptocurrencies has fallen slightly to $1.177 trillion as of this writing.

A Low Volatility Weekend

While the price movement of cryptocurrencies this morning betrays trader apprehension about crypto, analysts harbor no doubts about the asset class. Strategists at JP Morgan came out with a note on Wednesday to explain bitcoin’s recent price action. According to them, three factors – bitcoin’s role as a hedge to the turmoil in mainstream markets, the launch of bitcoin ordinals that “elevates the bitcoin network to that of other blockchains”, and an expected halving of supply next spring – have contributed to its inexplicable surge in the last month.

As has happened often in the past, there are no hard facts or proof to validate these theses. Bitcoin’s price rise has occurred amid a regulatory offensive against exchanges and drying out of liquidity in crypto, making it very likely that very few players are behind those rising curves in the price chart.

The implied volatility, a measure of expected price volatility in its price, is low going into this long weekend. The cryptocurrency’s underlying blockchain is primed to make that prediction a reality. Bitcoin’s hash rate, or the total amount of computing power deployed to its network, fell off a cliff last week and bottomed out on 3 April – a date when the cryptocurrency recorded a weekly low of $27,591.19. It is rising once again heading into Easter Sunday, even as the difficulty level of bitcoin’s algorithm, that determines its production rate, remains at record highs.

Ether Prices

More interesting developments have occurred in prices for Ethereum’s native token ether. They swept past the $1,900 mark yesterday morning, prompting a flurry of reports about investor excitement for the withdrawals of staked ether that is expected to happen on April 12.  

Should investors expect a price increase as that date draws closer?

Based on price action from this past September, when Ethereum implemented the first stage of the Merge, the answer to that question is a hard no. Profit taking for investors occurred much earlier before the actual event. And, given ether’s price movements this past month, something similar may have happened this time around.

There’s also the fact that, as the date for staking withdrawals comes closer, problems associated with it are also coming into sharp focus. The token also suffers from the same problem that plagues all crypto right now – an absence of liquidity.

Analysts have also latched onto the decrease in ether’s supply to explain the recent surge in ether prices. But that argument presumes value for ether after unstaking is enabled. The token is mainly used to pay gas fees on Ethereum’s network and the number of transactions on its network has remained constant this year.

There are no future spigots of demand for the token. Prices for NFTs, the main driver of demand in 2021, have crashed. It may well be that the decrease in ether’s supply will serve no purpose other than to sunset the token, after it is declared a security by regulators, out of existence.    

Tether’s Market Cap Surges

Tether’s market capitalization continues to surge. As of this writing, it is at $80.2 billion. At its peak, the stablecoin had a market cap of $83 billion in May last year. It shares top billing for bitcoin trading volumes along with TUSD – another unregulated stablecoin.  

Billions of New Tether Tokens

Because stablecoins are supposed to maintain a peg to $1, their market cap is closely related the number of tokens in existence. That means Tether has minted approximately $14 billion worth of new tokens this year alone. The stablecoin has been earlier charged with manipulating bitcoin price by creating the false impression of demand at exchanges through its tokens.

But it has deployed very little of its firepower this year, instead choosing to park of the new tokens at Tron, a blockchain whose founder has been charged with fraud by the SEC. Bitcoin price has continued to skyrocket, anyway, in the face of improbable odds and in an ecosystem starved of liquidity.

What Purpose?

Just what purpose do the Tether tokens at Tron serve?

The surge in token numbers is certainly not driven by demand considering the low liquidity figures reported by most research firms and funds in crypto. Most of the new Tether tokens are locked in cold wallets by cryptocurrency exchanges. Tokens that are not deployed for trading are loss-making propositions for exchanges because they do not generate fees.  

What’s more, the increase in Tether’s numbers also require the stablecoin to purchase or invest in an equivalent number of government-backed securities. Even with profits of $700 million in a single quarter, it is improbable that the stablecoin will be able to summon up $14 billion to invest in securities.

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