Continuing the trend of 2022, there is a lack of positive excitement in the crypto market. While Bitcoin (BTC) and altcoins were flat at the start of 2023, there are a few reasons volatility could spike in January.
Market caps during the 2022 holiday season. Source: Arkane Research
Winklevoss letter to DCG fuels bankruptcy FUD
On Jan. 2, Cameron Winklevoss, the co-founder of Gemini, authored an open letter to Digital Currency Group (DCG) founder Barry Silbert, demanding answers about $900 million in frozen customer funds. Gemini launched the “earn” program in coordination with Silbert, but $900 million in client funds have been frozen since November 16 due to DCG liquidity issues. Following the letter, Crypto Twitter began generating FUD for DCG as it believed there were liquidity issues similar to those faced by 3 Arrows Capital and FTX.
The financial drain that the big Gemini hole could place on DCG is significant, as they could be forced to sell sizable GBTC and ETHE positions, as well as other positions in trusts run by their sister company, Grayscale. According to Arcane Research, another avenue for DCG to meet debt obligations would be to initiate a Reg-M distribution, allowing holders of GBTC and ETHE positions to redeem them against the underlying assets at a 1:1 ratio.
Vetle Lunde, senior analyst at Arcane Research, noted:
“A Reg M would trigger a massive arbitrage strategy of selling crypto spot versus buying shares in the Grayscale Trust. If this scenario plays out, the crypto markets could face further downside.” 
Grayscale escrow holdings of the outstanding offering. Source: Arcane Research
Fear is high and liquidity low
The DCG and Gemini drama comes at a time in the market when sentiment has plummeted. Despite signs that investors are planning to get involved in crypto in 2023, most market participants are not feeling optimistic and are reluctant to delve into risky assets. The index is currently at 26 on a 100 point scale, which is the same as in December.
Fear and Greed Index. Source: Alternative.me
Such high levels of fear are even more relevant in times of low liquidity. Market activity continues to decline, reaching levels not seen since Binance introduced zero trading fees for BTC pairs on June 24.
BTC volume with and without Binance. Source: Arcane Research
If DCG were to go the Reg M route and spot market volume remains low, a correction in crypto prices could intensify in the near term.
The upcoming economic calendar points to possible volatility
As shown below, the macro markets are off to a busy start to 2023:
Wednesday, January 4th:
- ISM Manufacturing PMI (US Factory Activity)
- US JOLTs (Job Opportunities)
- Federal Open Market Committee (FOMC) meeting minutes.
Thursday, January 5:
Friday, January 6th:
- Non-farm wages and unemployment figures
- ISM PMI for non-manufacturing (a business situation survey)
Sunday, January 8th:
- Gemini’s settlement offer to DCG is expiring
Thursday, January 12:
- US Consumer Price Index (CPI) report on inflation
Friday, January 13:
- US banks begin earnings reports for Q4 2022
When the numbers come in below expectations or something out of the ordinary happens, the stock market can respond with sell-offs.
Reduced spot volumes are coupled with BTC volatility hitting a 2.5-year low. According to Lunde, the low volatility phase will not last too long:
“These periods of low volatility rarely last long, and periods of volatility compression used to tend to be followed by strong moves, even in stagnant markets.”
BTC 7 and 30 day volatility. Source: Arcane Research
Some analysts believe that the January 12 United States CPI report will show a rise in inflation. If this is the case, the Federal Reserve may continue raising interest rates, which has historically caused crypto market caps to fall.
With the possibility of further rate hikes coupled with the current market sentiment, a possible bankruptcy of DCG and reduced market liquidity, the crypto market could respond with another decline lower.
The views, thoughts, and opinions expressed herein are solely those of the authors and do not necessarily reflect or represent the views and opinions of Cointelegraph.
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