Beware the predictive power of Bitcoin halvings

  • The fourth Bitcoin halving will occur in April 2024
  • Previous halvings have preceded sharp price rises 
  • There are other factors at play, however, meaning caution should be taken when assuming that halvings for predictive power

Before we get to the heart of this piece, let us present a chart. It shows the Nasdaq Composite, the tech-heavy American stock index. Marked on the chart are three as-yet-unnamed events. What do you notice?

These events seem to all be followed by positive periods of expansion. They are, if you have not deduced by the title of this piece, the three Bitcoin halvings that have occurred to date. 

You may sense where we are going with this, but it is surprising how often the timing of these halvings within a macro context is overlooked within the crypto space. Halvings mark the dates at which the block subsidy reward on the Bitcoin blockchain is halved, and occur every four years. In other words, the new issuance of Bitcoins – released to miners as they work to validate new transactions – is cut by 50% every four years. 

This supply cut phenomenon is central to the underlying concept of Bitcoin, a hard-capped currency with a pre-determined supply schedule, immune to the whims of money printers and an elastic supply. It follows that many point towards this draining supply as an inevitable boost to the price. 

This is a fascinating relationship with regard to the long term performance of Bitcoin, but there is also an intriguing subplot to follow in the short-term: are these halvings priced in? 

Because they happen in advance, the argument that they should be priced in is an easy one to make, and essentially draws upon one of the most famous mantras in finance: the efficient markets hypothesis (EMH). 

And yet, the stellar performance of Bitcoin following previous halvenings leads some to swear that halvenings undoubtedly pump the price in. We will not go into that side of the argument here (on a high level, it is a complex relationship between miners and price moving towards the cost of production and is not necessarily as easy as just preaching the EMH). 

For now, we will play devil’s advocate and point out reasons why one should be careful regarding the assumption that Bitcoin will inevitably spike next year, given the next halving is slated for April 2024. 

The above chart clearly shows that halvings to date have preceded boisterous performance for Bitcoin. But remember our chart from the top of the piece? The Nasdaq has also accelerated strongly following previous halvings.

Do Bitcoin halvings push Nasdaq’s price up? Obviously not. The fact is that the halvings to date have lined up extremely well with global liquidity cycles, meaning that macro conditions have been soft and risk assets have taken advantage. 

Besides, our sample size is literally three here, far too small to draw any concrete conclusions from. Not to mention the first halving was in 2012, when Bitcoin was unknown to everyone outside of a very niche Internet community. Even in 2016, the asset had far less liquidity than today (even after the recent dip). Finally, the 2020 halving coincided with a one-in-a-generation pandemic and an explosion of expansionary monetary policy. Obviously, there were factors beyond the halving that were pushing Bitcoin up. 

What happens at the next Bitcoin halving?

This is not to say that Bitcoin will not jump post-halving next year. Indeed, when looking at the expectations of the market around the future path of interest rate hikes, we could well get the next halving again dovetailing neatly with global liquidity expansion. 

Additionally, as caveated earlier, the halving may not be priced in. We are not affirming it is not, we are merely preaching caution in the wake of a very small sample size and a near-perfect match with global liquidity. 

As also mentioned earlier, we will follow on with an in-depth piece around the economic argument that the halvings may actually not be priced in (spoiler alert: it may not even violate the EMH to say it is not priced in, as paradoxical as that may sound). But for now, this is just a warning: the halving is intriguing to all involved in the crypto market, but a blind assumption that it will act as a stout push factor for the Bitcoin price simply based off what has happened in the past could be a mistake.

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Stablecoin supply down below $125 billion as capital continues to leak from crypto

Key Takeaways

  • The total supply of stablecoins has fallen every month since UST collapsed in May 2023
  • Last month saw another $1.7 billion of outflows, the total supply now 33% off its peak
  • Tether’s market share has increased amid stuttering rivals, but all other coins have seen large drawdowns
  • Liquidity and volume in the space overall is thin and continues to fall

If one wanted to sum up the past few years in crypto, the stablecoin market would be a good place to start. 

The branch of the industry so important for liquidity has been heavily dented, with the total supply of stablecoins on the market now less than $125 billion. That represents a 33% decline from the peak of $188 billion, on the eve of the Terra collapse last May.

Since that infamous Terra meltdown, which saw the $18 billion UST not-so-stablecoin evaporate into thin air, the market has continued to pare down. In line with a tightening in financial conditions across the economy, the stablecoin supply has been reduced every month since. 

Last month saw another $1.7 billion reduction, the third largest of 2023. 

Tether market share increases 

To track the movements closer, you can hit “play timeline” on the below chart. Breaking down the overall supply into the largest stablecoins, nearly every coin has been hit hard. Nearly, that is, because there is one glaring exception: Tether. 

Somewhat ironically, given its long-debated cloudy reserves, Tether has re-established an absolutely dominant market share. Benefitting not only from the aforementioned demise of UST, but also the regulatory shutdown of BUSD ion February and the SVB-related fear (albeit brief) surrounding USDC in March, the Europe-based stablecoin has managed to avoid the harsh regulatory crackdown in the US and hoover up some of the capital fleeing rivals.

Its market share currently sits at a colossal 67%. With a market cap of $83 billion, the company revealed it generated an astonishing $1 billion in operating profit in Q2 alone, mainly due to the stout yields currently on offer through US Treasurys. 

Yet aside from Tether being well placed to take advantage of the obstacles that have suppressed rivals, the stablecoin market overall demonstrates the trouble of the cryptocurrency at large. 

Liquidity and volumes have collapsed, with volatility accordingly close to all-time lows. The capital flight of the space has been immense, as a tight monetary environment coupled with numerous scandals within the crypto space has hurt a sector which expanded rapidly during the zero-rate, money-printing bonanza of the COVID period. 

Where does the market go from here?

While the decimation in liquidity and volume is obviously a stark negative for the space overall, there have also been silver linings. 

The lack of volatility is welcome in some quarters, with the industry beset by multiple scandals last year, headlined by the FTX crisis in November. 2023 has thus far been marked by slow and muted market conditions. That is not ideal for traders and market makers, but for the reputation of the industry, at least the scandals of last year and the fallout of reckless risk management amid a suddenly-tightening economy appear to have subsided.  

Of course, there remains the matter of the largest cryptocurrency exchange on the planet, Binance, facing a litany of lawsuits. They allege everything from circumventing AML and KYC laws to manipulating volume and trading against customers. Without doubt, much of the space still operates in a highly opaque manner, so perhaps it’s foolish to declare those shocks a thing of the past.

Yet, either way, the trajectory of the space feels like it won’t shift until wider macro conditions allow it the slack to do so. The motive to hold a stablecoin, or invest in crypto in general, is far lower when US government-guaranteed bonds offer more than 5%. The risk-reward position is simply entirely transformed. 

With that said, there does appear to be hope that the tightening of rates is finally coming to a close. Looking at probabilities backed out by Fed futures, the market is anticipating a maximum of one more (if even that) rate hike before the Fed calls it quits. 

Perhaps then capital will be less hesitant to start looking towards this nascent asset class again. However, if one wants to get a quick gauge of how the crypto space has fared over the past couple of years, the stablecoin market is telling.

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Crypto volatility continues to plummet, spot volume now at two-year lows

Key Takeaways

  • Volatility briefly rose in crypto markets last month but is back near all-time lows
  • Capital flight out of the space has been enormous, with liquidity also at multi-year lows
  • Trading volume continues to decline, with Binance’s volume down 95% from the peak in 2021
  • Ethereum is now trading at a similar volatility to Bitcoin
  • A combination of tight monetary conditions in the economy, as well as crypto-specific scandals and a regulatory crackdown, have all made their mark on the space

Volatility in the crypto markets is back to multi-year lows. After a brief pickup amid the positive ruling on the Grayscale ETF case last month, markets are back to the placid state we have become familiar with this year.

Looking at 90-day annualised volatility, both Bitcoin and Ethereum are close to the lowest levels we have seen. The chart below shows that, aside from three isolated episodes, we have seen volatility in a near-constant state of decline since Q1 of 2022. That marks the infelxion point for the wider economy, when we transitioned to a tight monetary environmen, kicking off what would prove to be a gruesome time in crypto.

The three episodes of reprieve with regard to volatility were the Terra collapse and subsequent summer of bankruptcies (from May 2022), the FTX collapse in November 2022 and, most recently, the banking contagion in March 2022. Otherwise, it has been a downhill ride.

The muted state of the once-volatile asset class is hurting market makers and liquidity. While the entire ecosystem has been ravaged, it is important to note that the macro environment has also pared down in volatility this year, as can be seen on the below chart where we have included the 90-day volatility of the Nasdaq for reference. 

However, the scale of the decline in crypto has gone above and beyond. While digital assets remain highly correlated with risk assets (the tech-heavy Nasdaq being the classic example), the capital flight and drain of both volatility and liquidity form the blockchain sector have been unmatched elsewhere.

Such is the lack of volatility that we are now even seeing Ethereum trade with similar volatility to Bitcoin (for a brief period, Ethereum’s volatility was even even lower than Bitcoin’s), despite the former traditionally operating at volatility levels above the world’s biggest crypto. 

On the one hand, this is positive for Ethereum and demonstrates a growing maturity. On the other hand, the convergence is emblematic of the drain in overall volatility from the space at large. 

Yet, in the context of what is happening across the space, the drawdown is not surprising. We keep mentioning the capital flight and dearth of liquidity; in looking at the numbers, the chasm compared to previous years is enormous. 

Fiat trade volume on Binance, the world’s biggest exchange with an approximate two-thirds market share of total volume, is down to its lowest level in more than two years. Fiat trade volume on Binance has declined by more than 60% since early January and is down 95% relative to its 2021 peak, according to data from Kaiko. 

While Binance is facing myriad issues which may have exacerbated the decline, the underlying fact remains: liquidity has fled the space at the speed of light, to the extent which has surprised perhaps even the most bearish of crypto analysts’ predictions. Not to mention, one of the many accusations levelled against Binance through several lawsuits is an alleged manipulation of trade volume, so perhaps the dropoff is even worse than those above numbers imply. 

Given volume and volatility go hand-in-hand, the subsequent drawdown in the latter is, therefore, not surprising. Crypto resides as far out on the risk spectrum as can be, and in a world that has seen interest rates jump from 0% to above 5% – and at a pace among the fastest in modern economic history – the fallout makes sense. And that is without even layering in the numerous scandals and crypto-specific episodes which have pushed market makers and investors alike away.

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Could softer liquidity conditions finally pump Bitcoin?

Key Takeaways

  • The US unemployment rate jumped to 3.8% last month, from 3.5% previously
  • Cooling economic data has strengthened the market’s resolve that interest rate hikes could soon cease
  • Implications for a pivot in policy are key for the crypto markets

Bitcoin has had a torrid time ever since the economy transitioned to a tight monetary environment for the first time since the Genesis block was mined, all the way back in January 2009. 

Throughout 2022, the tightening of liquidity conditions dragged Bitcoin down (also helped by some rather shocking events within the crypto ecosystem). From trading as high as $68,000 in Q4 of 2021, it tumbled as low as $15,500 before bouncing back somewhat thus far in 2023. 

This makes sense, given Bitcoin resides so far out on the risk spectrum. The question of whether Bitcoin can one day operate as an uncorrelated asset, or some sort of digital gold, is an intriguing one. It is evident, however, that this has not yet happened. 

Partially propelled upwards by the rampant money printing and easing of global liquidity since the financial crisis in 2008 (which just so happens to coincide with Bitcoin’s launch, a fact which did not go over the head of Satoshi Nakamoto when he/she mined the Genesis block), Bitcoin went parabolic during COVID when central banks really took things to the next level. 

But the music had to stop. And when inflation began to spiral, those same central banks were forced to reverse course, embarking on one of the most rapid tightening cycles in recent memory. Up went interest rates, dispelling the complacent notion that the new era of zero-rates was here to stay. And they kept going up – today, T-bills are paying north of 5%.

The chart below demonstrates the steep incline of the key Fed funds rate:

With economic data remarkably consistent, the Fed was forced to stay the course, rates rising ever higher and higher. Despite some wobbles along the way (the regional bank crisis led by the collapse of Silicon Valley Bank is the clearest example), the economy continued to hum along just fine. 

While this seems like good news (and it is!), it has led to a sort of good news is bad news paradox. To rein inflation in, the economy must slow down. But if the economy does not slow down, inflation remains high and hence rate projections also stay elevated. This is why we have often seen a scenario where markets fall on good news. 

Is the economy slowing down?

However, this could all be about to change. Finally, it seems as if the economy could – finally – be losing some momentum. The most recent Labor Department report shows the unemployment rate jumped to 3.8% last month, from 3.5% previously. 

On the one hand, this shows quite how unusual a situation we are in. Sentiment feels negative, rates have been hiked to oblivion, and yet unemployment is near half-century lows. At least it was, until this report. 

The 30 bps jump is not dramatic, but it could be significant and a demonstration to the Fed that it may be able to (finally) take its foot off the gas. Average hourly earnings also rose 4.3%, down slightly from 4.4% in July. And while employers added 187,000 workers to their payrolls in August, which was a greater number than July, revisions in prior months have shown job growth to be not as strong as first reported.

All in all, this is far from a seismic fallout, but it does at least point towards some progression. Looking at markets, traders felt the same way. Projections around the future path of interest rates immediately became more dovish. The next chart backs out probabilities implied by Fed futures, comparing the projections for the next Fed meeting on 20th September with those same projections a week ago, before the jobs report. 

The chances of a hike at the meeting dropped from 20% to 6%, with the market now expecting no hike with a 94% probability. 

Combined with inflation already coming down significantly in the last twelve months, the macro conditions are undoubtedly far better than they were at this time last year when inflation was not far off double digits. 

Again, the shift is far from dramatic, and the data overall remains strong. 3.8% unemployment is still a stellar number, while wage growth has slowed but is still hotter than what the Fed desires. 

But finally, with rates north of 5%, it appears that the end of the tunnel may be approaching. For Bitcoin, which trades like a high-risk asset, this paints optimism. Of course, the flip side of this is that Bitcoin is already up 55% on the year. Investors must decide to what extent a pivot off tight conditions is already priced in. 

In that respect, the latest report spells out a notable warning. Despite the “optimistic” news that the hiking of interest rates could draw to a close, Bitcoin barely moved as the numbers hit the market. Figuring out this dilemma will be key for Bitcoin traders, but at least the long-term picture feels clearer after eighteen months of brutal liquidity tightening. 

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DeFi risk-reward remains out of whack, TVL continues to dip

Key Takeaways

  • The total value locked in DeFi is close to levels last seen in March 2021 
  • Ethereum is a commanding leader with 57% of the market share, but the overall market has shrunk drastically
  • Sky-high yields proved unsustainable, while trad-fi interest rates have risen sharply, with investors reallocating capital as a result
  • The reputational damage of crypto could also be hurting the sector

The total value locked in DeFi continues to sink, currently close to levels last seen in March 2021. From peaking in November 2021 at nearly $180 billion, it has fallen 80% to $37 billion. 

The stark dropoff last year comes as no surprise. Cryptocurrency as a whole was decimated – the Terra crisis alone in May 2022 is evident on the above chart as causing a massive drawdown. Beyond that, token prices collapsed, and hence TVL has come down drastically.

Yet, thus far in 2023, crypto prices have rebounded strongly. However, by repurposing the previous chart by now zooming on 2023, we can see that TVL has failed to rise.

Digging into the different blockchains, Ethereum remains the commanding market leader. It holds 57% of TVL across the space, with Tron a distant second with 13.9%. BNB Chain, launched by the embattled Binance, is third with 7.8%, with all other chains below 5%. 

Bearing in mind that Ethereum holds such a commanding lead in the space, we can dig into its TVL trend to see that the dropoff is not solely a result of falling token prices. 

For this, in the next chart we present the TVL both denominated in dollars and ETH. While dollar-denominated TVL is what we have focused on thus far in this piece, it is obviously affected by virtue of the fact that much of the TVL is held in crypto rather than fiat. Yet if we analyse the TVL in terms of ETH, which is down 55% since the start of 2022, we see that it is also down substantially. 

If we focus on 2023, we see that the TVL in terms of ETH has fallen less than in dollars, which makes sense given the converse has happened; the denominator has become larger (i.e. ETH has increased, up 35% this year). 

Therefore, the decline is not solely a result of falling prices. In reality, the entire crypto ecosystem is still seeing suppressed volume, liquidity and overall interest. DeFi’s momentum has also slowed, not helped by the fact that the sky-high yields which drew so many to the space during the pandemic have proved to be unsustainable (granted, this is mainly to do with elevated token prices).  

In conjunction with this last point, trad-fi yields have gone the opposite way – steeply up. T-bills are the safest investment in the world, guaranteed by the US government, and they now pay more than 5%. The decision about where to allocate one’s capital in this environment is vastly different to the same proposition when interest rates were at 0%. 

With a slew of ETF applications coming online in recent months, there is optimism that crypto could soon turn a corner. Exacerbating this is the expectation that, finally, we may be approaching the end of the tightening cycle. 

If/when the reversal comes, DeFi will be in a stronger position to persuade capital to return. The reality is that, right now, with interest rates above 5% and DeFi yields coming down so sharply, the risk-reward ratio is just not where it needs to be for prospective investors.

Moreover, the reputational damage sustained by crypto (even if that was unfair on DeFi, which some would even argue presented its true worth in comparison to CeFi firms like Celsius and BlockFi), may have dented its progress further again.

Times will change, but the capital outflow from DeFi is not surprising in this context. 

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Ethereum volatility falls below Bitcoin as volume lags

Key Takeaways

  • Volatility has picked up in the last two weeks but remains low compared to normal levels
  • Ethereum’s realised volatility has now dipped below Bitcoin’s
  • Suppressed trading volumes are a big reason why volatility is lacking
  • August brought the lowest trading volume since October 2020

Ask anybody to describe the cryptocurrency markets, and there is a strong chance that the word “volatile” will be mentioned. 

The nascent asset class is well known for aggressive price moves. However, it has not lived up to that reputation this year. Despite Bitcoin having increased 55% since the new year, the rise has been characterised by a slow and steady climb rather than sudden jumps as we have seen so often in the past. 

A glance at its volatility, plotted on an annualised basis over a rolling 30-day window, shows this below. While the volatility has risen in the last two weeks amid news of the positive ruling on Grayscale’s case against the SEC, as well as other ETF-driven narratives, it is still lagging far below what we have come to expect from Bitcoin. 

To be clear, realised volatility in the mid-30s is still extremely elevated when compared to other asset classes, so nobody is arguing that Bitcoin is now stable. Yet when compared to what we have seen over the years from Bitcoin, it is certainly unusual

Perhaps the best way to sum up the placid nature of the crypto market is to compare the volatility of Bitcoin and Ethereum. Bitcoin tends to lead the crypto market, with altcoins trading like levered bets on the world’s largest crypto. While Ethereum may be too large at this point to qualify as an altcoin, it has nonetheless tended to display higher volatility than its bigger cousin. This gap has come down in 2023, however, as the below chart shows. 

In fact, Ethereum’s realised volatility is actually currently below that of Bitcoin. The next chart zooms in the 2023 period, showing this “flippening”. 

It is the fourth time this year that Ethereum has printed volatility below Bitcoin. The previous three times saw a swift regression, so it may happen again. Either way, the gap has been oscillating close to zero since the start of the year.

Why is volatility so low?

For many, Bitcoin – and crypto as a whole – must shed its habit of violent volatility. Should the asset achieve its goals of becoming a reputable store of value or a digital equivalent of gold, its value cannot fluctuate as much as it has for much of its existence. 

Hence, it may be tempting to paint the dropoff in volatility in a positive light. However, that may be misguided. In truth, volatility and volume move hand in hand. And crypto volume has collapsed in the last two years. 

August exchange volume came in at $423 billion, less than half of what it was at this time last year. 

The $423 billion of volume last month was the lowest of any month since October 2020, before Bitcoin exploded into mainstream consciousness with a relentless run-up past its then-all-time high of $20,000. 

The next chart shows exchange volume going back over the last two years, with volumes around $2 trillion at this time in 2021 – 5X last month’s figure. 

While the earlier points regarding Ethereum trading with lower volatility may be dismissed by some as an argument that Ethereum is maturing and separating itself from the rest of the non-Bitcoin market, the suppressed volume is undoubtedly concerning for the market as a whole. It is also part of the reason why volatility is so low. 

It feels inevitable that volatility and volume will pick back up. This is where ETFs, macro clarity, sentiment pickup and an overall brightening of the picture will help. And more likely than not, these will all occur, it is just a matter of when. With April 2024 now only seven months away, there is also Bitcoin’s fourth halving coming down the tracks – although it remains to be seen what effect that may have. 

But for the moment, volatility and volume are both trickling along, far below what we had come to expect from this corner of the financial markets. remains to be seen

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ETF season continues as Ether application lodged while markets plod along

Key Takeaways

  • The crypto market has seen increased volatility off the back of ETF developments in the last couple of weeks
  • Grayscale secured a positive ruling in its case against the SEC regarding its ETF application
  • Markets subsequently fell as the regulator pushed out the approval date of all ETF applications
  • Cathie Wood’s ARK Invest has now filed for a spot Ether ETF
  • Market is largely anticipating the approval of a futures-based Ether ETF before mid-October
  • ETFs are inevitable, and while the headlines may be repetitive, there is little volatility coming from anywhere else these days

The crypto markets are still enduring uncharacteristically low volatility, but there has been at least a little pickup in recent weeks. 

Most of it is due to ETFs, whether one way or another. Last week saw Grayscale secure a landmark decision against the SEC, with a federal court ruling that the SEC was wrong to reject an application from Grayscale Investments to convert its trust into an ETF. The judge said the regulator failed to “offer any explanation” following its decision. 

This sparked a fresh wave of optimism that not only would Grayscale secure ETF approval, but the slew of other applications currently on the waitlist would also be successful. 

However, markets gave back most of those gains when the SEC announced shortly thereafter that it was pushing out the decision on all ETFs until October. 

This delay aside, however, the regulatory picture is brightening significantly for crypto. Only a few months ago, the future of the entire industry seemed to be under threat in the US. While there remains serious concern over large swathes of the space (the myriad allegations against Binance alone could prove seismic), it is beginning to feel inevitable that ETFs are simply a matter of time. 

Not only that, but hope is now swelling that Bitcoin may not be the only asset to achieve the ultimate stamp of approval. Cathie Wood’s Ark Invest and 21Shares have filed for a spot Ethereum ETF, the first attempt to list such a fund in the US. 

While this represents the first spot ETF attempt, there have been several applications on the futures side for Ether. Bloomberg reported in August that the regulator would likely approve these products, which number nearly a dozen – an expectation that most around the industry are in line with. 

The SEC’s hesitance regarding spot ETFs has centred around the fact that there is not a regulated crypto market of sufficient size to prevent market manipulation. While many decry this refusal to approve the ETFs as unjustified, it is easy to see their hesitance when looking at the state of liquidity. Spot volumes have been decimated this year, while futures and derivatives have fared far better.

In truth, when the approval does come, it should bolster liquidity itself, in somewhat of a chicken and egg problem. And with demand increasing for these products, there is only so long that the SEC can resist approving these products. 

The macro situation may also play a role here. Interest rates have been hiked from near-zero to north of 5% in the US in what amounts to one of the swiftest tightening cycles in modern history. Accordingly, investors have retreated along the risk curve. Crypto is about as risky as it gets, with prices crashing as a result. Despite Bitcoin rising 55% thus far this year as inflation softened quicker than anticipated and expectations around the future path of interest rates became more optimistic, it is still over 60% off its high from Q4 of 2021. 

Yet the market is now anticipating only one more (if even) rate hike still to come, something which may spur more investors to move back into the space and liquidity to bounce back. There is also the matter of the halvening in April 2024, although it remains too soon to declare with confidence what the effect of that event will be. 

We will likely look back upon these days as low-level, bureaucracy-driven table setting for what lies ahead. Even already, the various ETF news is not having quite the same effect as some of the earlier stories this year – the Ethereum ETF application barely moved markets an inch. But it’s all necessary for this nascent asset class. And in recent times, it has been about the only source of volatility at all.

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Bitcoin volatility increases but remains far off historic levels

Key Takeaways

  • The last two weeks have seen increased volatility in the crypto markets
  • Bitcoin fell from $29,000 to $26,000 two weeks ago before bouncing back briefly, only to fall again
  • Thin liquidity means the market is ripe for big moves, but trading volume remains suppressed
  • The future should see a return to the volatility the market has come to expect

The year 2023 has been a strange one for crypto. The extreme volatility the sector has become so well known for has been lacking. 

This is despite the price of Bitcoin being up 55% thus far this year. Yet rather than the usual spikes and freefalls, it has been a slow and gradual increase. 

In the last couple of weeks, however, volatility has picked up. It is not quite at the levels we are accustomed to seeing, but it is no longer at all-time lows, either. Two weeks ago, Bitcoin fell from $29,000 to $26,000, including a 7% fall in a ten-minute span. 

Last Thursday, it then jumped 6%, back up to $27,700. Two days later, it had given up those gains, trading at $25,900. 

While the price action of the last two weeks is not dramatic by Bitcoin’s standards, it at least represents a closer picture to what we have come to expect from the asset. 

The boost last week was led by a positive court ruling regarding the Grayscale Bitcoin Trust. A three-judge panel of the District of Columbia Court of Appeals in Washington ruled that the SEC was wrong to reject Grayscale’s proposed Bitcoin ETF without explaining its reasoning. 

However, those gains have since been given up. The SEC said late Thursday in a series of filings that more time was needed to consider the slew of ETF applications which have been lodged in recent months. 

As we said, rampant volatility has been one of the calling cards of this asset since it was launched fourteen years ago – and even this recent bout is relatively minor and seems to be driven by the ETF news. That is why 2023 has been unusual- it was the absence of volatility before the last couple of weeks that is more surprising than its recent abrupt increase. 

Volatility should return to prior levels

Again, however, this bout of volatility is hardly anything to write home about by Bitcoin’s standards. Furthermore, studying the market structure suggests that we should not expect subdued activity for too long. 

One of the prime reasons for this is liquidity. Order books are as thin as they have been in quite some time on Bitcoin markets. This means less capital is required to move prices, amplifying moves to both the upside and downside. 

Looking across the space shows that while prices have rebounded this year, volumes remain at multi-year lows and capital continues to flow out of the space. 

Trading volume and volatility come hand in hand. It makes sense, therefore, that we have seen the latter drop as investors have pulled capital, retreating on the risk curve amid tough macro conditions. 

However, the liquidity situation, combined with the inherent nature of the crypto markets – and the fact that volatility has never gone away for long – means that it would not be a surprise to see the subdued markets ramp back up. The last two weeks have seen a move in this direction, but in the grand scheme of things, it is nothing compared to what we have seen in the past, nor what we may see once more in the future. 

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Grayscale Bitcoin trust discount narrowing, SEC pushed out ETF deadline

Key Takeaways

  • Crypto volatility has picked up in the last two weeks
  • A positive court ruling regarding the conversion of Grayscale’s Bitcoin trust into an ETF propelled markets last week
  • Gains have since been given up as SEC pushed out assessment date for ETF filings

After a long period of calm, the crypto markets have finally shown signs of life in the last couple of weeks. First, the price of Bitcoin fell from $29,000 to $26,000 two weeks ago, including a 7% dip in ten minutes, as markets recalibrated to more hawkish interest rate expectations.

Last week, the price rose back up to $27,000, buoyed by a seemingly positive ruling in the courts. A federal court ruled last Tuesday that the SEC was wrong to reject an application from Grayscale Investments to convert its trust into an ETF, the judge saying the regulator failed to “offer any explanation” following its ruling. 

While this does not guarantee the eventual conversion of the trust into an ETF, it is nonetheless a big win for both Grayscale and traders who were betting on a positive outcome, with a firm recommendation to the SEC that it should review its decision to reject. 

Previously, the SEC rejected Grayscale’s application on grounds that the products were not “designed to prevent fraudulent and manipulative acts and practices.” Grayscale subsequently sued. 

However, the boost to markets ended up being short-term, for reasons again related to the SEC. The regulating body delayed its decision on all ETF applications, including those filed by Blackrock and Fidelity, to October. Soon, Bitcoin was back down at $26,000. 

The week sums up the year so far for Bitcoin, an asset that has been tossed about by developments in the regulatory sphere all year. 

However, assessing the price of GBTC, and comparing it to Bitcoin, does show that the market feels more regulatory clarity is on the way – and potentially in a positive way. In the next chart, we have plotted the performance of GBTC against Bitcoin since the latter’s all-time high in November 2021. 

Throughout the bear market, as well as the rebound in 2023, Grayscale investors have suffered worse than counterparts who invested in Bitcoin directly. But in recent months, the discount has been declining, with the court ruling pushing a substantial convergence last week.

If we plot the same two assets again but instead of going back to Bitcoin’s all-time high in Q4 of 2021, we look at returns since the start of the year, it is GBTC that outperforms. 

The jump in mid-June stands out, which coincides with the filing of multiple spot Bitcoin ETFs, led by Blackrock. This led the market to move towards the assumption that conversion of Grayscale’s trust into an ETF is more likely – something which has become more real again following the ruling last week against the SEC, and hence caused even further outperformance by GBTC.

Following the ruling last week, the discount of GBTC to its net asset value has narrowed to 19%, the lowest since 2021. 

In truth, the conversion of GBTC to an ETF feels inevitable, the court ruling summising what most around the market would believe should happen at some stage. 

JP Morgan agrees, and also speculated positively about what the ruling means for other ETF filings, with its analysts writing this week that “[The delay] likely points to approval of multiple spot bitcoin ETF applications at once rather than granting a first-mover advantage to any single applicant.”

The market doesn’t lie, and with the discount on GBTC down to 19%, it represents substantial progress. However, 19% is still an enormous chasm, highlighting that there remains a way to go before all this is resolved. 

The post Grayscale Bitcoin trust discount narrowing, SEC pushed out ETF deadline appeared first on CoinJournal.

How correlated is MicroStrategy stock to the Bitcoin price?

Kay Takeaways

  • 1 in every 127 Bitcoins are owned by MicroStrategy
  • The stock price tracks the price of Bitcoin remarkably well
  • Despite price correlation, there are additional risks to the stock, while it violates the “not your keys, not your coins” mantra
  • For investors unable to purchase Bitcoin directly, however, it does provide an alternative means of Bitcoin exposure
  • With 0.79% of the circulating supply owned by the company, it also throws up concern about a centralisation of wealth

Google “MicroStrategy” and Wikipedia will tell you that it is “an American company that provides business intelligence, mobile software, and cloud-based services”.That may technically be true, but in reality it has become a Bitcoin investment vehicle. 

MicroStrategy, under the borderline-religious leadership of Michael Saylor, currently owns 152,800 Bitcoin. That is 0.79% of the circulating supply; in other words, 1 in every 127 Bitcoin is now owned by MicroStrategy. When omitting the portion of the Bitcoin supply which is lost (for which estimates generally come in at about 1.5 million), the company owns 1 in every 118 coins.

What’s more, since MicroStrategy’s first Bitcoin purchase on August 8th, 2020, there have been just over one million coins created. This means MicroStrategy’s stash equates to 15.3% of the total coins created since they started buying. 

Clearly, no matter what way you swing it, MicroStrategy own an enormous stash of Bitcoin. Here, we will assess how it affects their stock price.

Performance vs Bitcoin

The place to start is, unsurprisingly, MicroStrategy’s correlation with the Bitcoin price. On the next chart, we can see that the correlation has picked up markedly since the company began buying up the supply. Bar a brief dip in August last year, the relationship has been extremely strong since late 2021. 

This is not surprising when one looks at the numbers. MicroStrategy has averaged $497 million of revenue over the last three years, with an average EBITDA of $50 million. And yet these numbers are dwarfed by its Bitcoin supplies – it owns approximately $4 billion worth of Bitcoin at the time of writing, purchased for $4.53 billion.

The market cap of the company is only marginally more than the value of its Bitcoin, coming in at $4.7 billion. 

If we plot the performance of the company against the performance of Bitcoin since the first purchase in August 2020, both assets have trodden an extremely similar path.

There are currently 11.834 million shares of MicroStrategy outstanding. With the company holding 152,800 Bitcoin, that implies that each share equates to owning 0.0129 Bitcoin. With the current share price of $329, this means that a $1000 investment in MicroStrategy nets you 0.0392 Bitcoin. 

In contrast, a $1000 investment in Bitcoin directly at the market price of $26,100 would net you 0.0383 Bitcoin.

Obviously, this is simplistic and looks beyond a whole host of variables on the MicroStrategy side (not to mention the extreme volatility of both assets). Bitcoin enthusiasts will also decry the fact that purchasing MicroStrategy stock is nowhere near the same thing as buying and holding your own Bitcoin – “not your keys, not your coins”.  

And they would be absolutely correct. These are completely different investment vehicles. However, with no spot Bitcoin ETF currently approved in the US, many institutions and other large entities have difficulty investing in the cryptocurrency for regulatory and compliance reasons. If an institution seeks exposure to Bitcoin, therefore, it is often required to pursue alternative options.

MicroStrategy may not be the real thing, and carries plenty of risks which direct purchases of Bitcoin do not. However, in terms of price exposure alone, it is a viable backup option.

Companies that are locked out of purchasing Bitcoin for the aforementioned reasons, but gained exposure through MicroStrategy, have benefitted well. The next chart plots its performance against the Nasdaq – it displays similar outperformance to what we have seen from Bitcoin over the time period. 


While this is all well and good, it would be remiss not to mention the fact that there do exist downsides here for the Bitcoin ecosystem. Sure, offering exposure to investors who, at least over the last couple of years, have not been in a position to purchase Bitcoin directly is a good thing. 

On the flipside, however, this is an asset built upon the principles of decentralisation. We are now in a position where one company owns an enormous chink of the supply, and does not seem as if it will curtail its buying anytime soon, as its stash creeps close and closer to 1%. 

Speaking of 1%, most of the world’s wealth is already in the hands of the top 1%. While Bitcoin often paints a romantic image of a democratisation of wealth, and a means of pulling oneself out of financial tyranny, the reality is that there will also be a 1% who own a massive slice of the pie. It will be no different to any other asset in this regard. 

We put out a piece in March assessing the wealth breakdown of Bitcoin, mentioning a study by the National Bureau of Economic Research outlining that the top 10,000 Bitcoin investors control one-third of the total supply. 

The anonymous Satoshi Nakamoto owns an estimated 1 million coins alone (or as a group, depending on what you believe regarding his/her/their identity), equivalent to over 5% of the supply. Nakamoto’s large holdings were even mentioned in Coinbase’s S-1 filing when it went public in 2021 as a source of risk to the business. 

“The identification of Satoshi Nakamoto, the pseudonymous person or persons who developed Bitcoin, or the transfer of Satoshi’s Bitcoins” was outlined as a risk to Bitcoin and, by extension, Coinbase’s business. 

While speculating on Nakamoto’s identity is a fool’s game, and these coins could easily be lost forever, it is easy to see how Coinbase listed this as a risk in its filing. The fact is that one entity or person holds 5.2% of the supply, and nobody has any idea who. 

We know who MicroStrategy are, and Michael Saylor is often lauded in the space for being a visionary (not to mention the fact the tidal wave of buying pressure serves to help boost the price now and again). But for an asset built upon the concept of decentralisation, it does provide pause for thought. 

Having said that, Bitcoin does remain the closest thing to decentralisation that the world has right now in the monetary sphere, even if it is not perfect. There will always be a 1%, because that is how life works – and Bitcoin is no different in this regard. 

The post How correlated is MicroStrategy stock to the Bitcoin price? appeared first on CoinJournal.

Long-term holders weather brief volatility surge

Key Takeaways

  • Long-term holders now hold 75% of the total circulating supply of Bitcoin
  • The cohort has been growing steadily over the last eighteen months
  • Enthusiasts hope the growth in the number of coins hoarded by long-term holders will cause a supply shortage and squeeze the price upward in the long-term

The last eighteen months have been challenging for Bitcoin investors. While the asset has bounced back strongly thus far in 2023, it remains over 60% off its all-time high set in November 2021. 

The scale of the damage in 2022 can be seen when glancing at a price chart, portraying the extent of the fall. 

The asset careened downwards as the Federal Reserve transitioned to a tight monetary policy approach in response to spiralling inflation. From years of low interest rates, hikes came thick and fast as policymakers scrambled to get a lid on an overheating economy. 

With Bitcoin residing so far out on the risk curve, capital fled the asset amid the great tightening of global liquidity. However, while price charts don’t make pretty reading, there has been one notable bright spot when looking at on-chain data. 

That is the proportion of long-term holders, which has shown impressive growth throughout the turbulence. As the next chart from Glassnode shows, the cohort has grown since the start of 2022 aside from three periods (with one of those extremely short).

(As a note, Glassnode defines long and short-term holders via a logistic function centered at an age of 155 days and a transition width of 10 days). 

The first period was between May and August 2022, when the crypto world was thrown into disarray. Already fighting a glum macro picture with newly-rising rates and rampant inflation, digital assets got hammered further with the startling death spiral of the UST stablecoin, leading to the collapse of all things Terra. This in turn sparked contagion across the sector, the summer filled with bankruptcies. 

The second period which saw long-term holders waver was very brief, following the FTX collapse last November. The third was then March of this year, which saw apparent profit-taking as Bitcoin increased off the back of more dovish forecasts around the future path of interest rate rises following the regional bank crisis. 

This has led to a position today whereby 14.6 million Bitcoin are held by long-term holders, equivalent to 75% of the total circulating supply. 

The portion of the supply claimed by long-term holders is interesting to track as it is an oft-referenced point by Bitcoin enthusiasts when forecasting the long-term price of the asset. With the overall supply capped at 21 million coins and the rate of increase in supply halving every fours years, they argue that a supply-side squeeze will push the price of Bitcoin up. As long-term holders hoard greater amounts of the supply, there will only be less Bitcoin to go around. 

Obviously, the demand side of the equation needs to hold up its end of the bargain for this to be true. But amid an extremely challenging eighteen months for Bitcoin, the apparent resilience of long-term holders is certainly a silver lining, and may become more and more relevant as time goes on.

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Over a billion dollars liquidated in crypto’s worst day since FTX

Key Takeaways

  • Last week saw crypto suffered its worst 24 hours since FTX as over one billion dollars in derivatives were liquidated on Thursday
  • Derivative volume outstrips the extremely low spot volume, with cascading liquidations having the potential to exacerbate price moves
  • Volatility was sparked by sell-off in the bond market
  • Developments re-affirm how vulnerable Bitcoin is in the short-term to the highly unusual macro climate 

Following an extended period of rest in the crypto markets, the beast re-awakened last week. Crypto markets plummeted late Thursday and early Friday, led as always by Bitcoin. The world’s largest cryptocurrency shed 7% in what amounted to the largest one-day drop since the spectacular collapse of FTX last November. 

The year 2023 has been characterised thus far by the unusual fact that crypto’s rise has been slow and steady. Aside from a jump in March amid the regional bank crisis, Bitcoin has been perceptively devoid of the usual spikes and freefalls. 

The Bitcoin price displays this clearly in the next chart, as well as Friday’s trip south.

Digging further into last week’s price drop shows that, remarkably, Bitcoin fell 8% in just ten minutes from 9:35 PM GMT on Thursday evening. Looking at data from Coinglass, this contributed to a surge of liquidations. All in all, over one billion dollars was liquidated in what amounted to the biggest day of liquidations since the FTX demise (anytime the phrase “since FTX” is used in crypto, it rarely spells good news). 

The flood of liquidations highlights how much greater the volume was in derivatives markets than spot, with the latter remaining extremely thin. Order books have been perceptibly shallow ever since Alameda evaporated amid the FTX debacle (liquidity was thin even before then). 

What caused the sell off?

The underlying cause of the volatility was a sell-off in the bond market, with yields spiking to multi-year highs. Yields on long-term US government debt neared their highest level since 2007, UK 10-year gilts rose to their highest yield since 2008, and Germany’s 10-year bund reached its highest yield since 2011. 

Higher yields spell trouble for risk assets, as we are well aware by now, with Bitcoin sent tumbling amid the tightening monetary environment last year. The recent move was borne out of investors betting that high interest rates will persist for longer than previously anticipated, or further hikes may not be as improbable as previously expected. 

The inverse relationship between Bitcoin and yields has been strong, demonstrated in the below chart. Hence, Bitcoin’s drop is not surprising in the context of the developments in the bond market last week. 

The sell-off reaffirms how vulnerable Bitcoin is to a macro situation that continues to perplex – high but falling inflation, while high interest rates contrast with record-low unemployment and relatively resilient economic data. 

Getting back to the derivatives market, the shift was further evident by looking at funding rates, with the Bitcoin OI-weighted funding rate dipping below -0.01% for the first time since March. 

Finally, negative funding rates and freefaling open interest returned. It took a while, but volatility has returned.

What next for crypto?

What this spells going forward is up for debate. Some analysts affirm this is a mere blip, a drop sparked by complacent overleverage following a period of calm that felt like forever. A slight increase in hawkish sentiment going forward won’t ultimately change much, they argue, for an economy which seems increasingly ambitious about achieving a soft landing. 

On the other hand, some fear there could be a return to 2022-like conditions. While that may seem extreme, there is every change there is a recalibration away from the borderline-celebratory stance that interest rate hikes were complete and the soft landing was already guaranteed. 

If that were the case, this could mark the end of the bear market rally for crypto. Few assets are as sensitive to global liquidity as Bitcoin is, meaning a reversion towards the tightening seen last year would undoubtedly spell red candles on price charts.

This would be getting ahead of oneself, however. The macro climate remains largely unprecedented and very challenging to predict. Even the Federal Reserve’s language betrays this, with some notable see-sawing in recent meetings. 

Last Wednesday, meeting minutes said that there are “significant upside risks to inflation, which could require further tightening of monetary policy”. Going back to the meeting in July, minutes say that the Fed believed inflation was falling and risks “titled to the downside”, with Jerome Powell asserting that “given the resilience of the economy recently, (the Fed is) no longer forecasting a recession”. 

While these are not necessarily conflicting – one can have inflation and tightening without a recession, it is just quite difficult (but where we have been living for the last eighteen months) – it does highlight how uncertain the whole climate is. 

Bitcoin is again caught in the crossfire, a risk asset subject to the whims of the wider market as it grapples with this fast-changing environment. 

The post Over a billion dollars liquidated in crypto’s worst day since FTX appeared first on CoinJournal.

Crypto market participation continues to dip

Key Takeaways

  • Trading volume, liquidity and volatility are all falling in the crypto markets
  • Even Bitcoin’s strong rise thus far this year has been steady and methodical rather than via sudden spikes, as in the past
  • Bitcoin dominance is rising, uncharacteristic during periods of price increases, highlighting a potential divergence 
  • Regulatory crackdown is suppressing market participation through lawsuits against exchanges and heightened legal uncertainty 
  • Volatility should return eventually, but previous six months have been the most placid in recent memory

It’s all quiet on the blockchain front. 

The crypto markets continue to plod along with volume, liquidity and volatility all extraordinarily low. All across the board, the numbers point to market participation lowering incessantly. 

Even Bitcoin’s rise year-to-date, which is impressive thus far at 76%, has come through steady, methodical gains. This contrasts sharply with previous bull markets, which have seen the asset spike higher in very short time periods. Then again, the market seems unsure of whether this is a bull market, a bear market, or something in between.

The slow but steady incline this year has come amid a further fall in trading volume. Last year, volumes on centralised exchanges fell 46%. This came amid a vicious bear market, highlighted by several scandals, such as the FTX collapse, Terra’s death spiral and numerous bankruptcies. 

The year 2023 has seen the trading slump continue lower, without even the dramatic episodes of volatility such as those aforementioned scandals. The Block’s data for July has trading volumes now at levels last seen in 2020: 

As we analysed here recently, this is partially a result of a typical summer trading lull, something which affects asset classes beyond crypto, too. The next chart from Kaiko shows this, with Q3 frequently yielding the lowest volume in Bitcoin’s short history. However, it is prudent to note that this is heavily skewed towards the last couple of years, with Bitcoin surging into mainstream consciousness and its liquidity therefore rocketing. Hence, blaming this lull on seasonality alone feels misguided.

Bitcoin dominance is rising 

Looking beyond Bitcoin, altcoins have also been quiet. There have been stories of the odd meme coin (Bald and Pepe, to name a couple) that have gained attention, but in comparison to previous years, the altcoin market has been devoid of the usual intrigue. 

One way of looking at this is the notable rise of Bitcoin dominance, which measures the ratio of the Bitcoin market cap to the entire cryptocurrency market cap. It has risen above 50%, up from around 40% at the start of the year. 

This rise in Bitcoin dominance is unusual because it has occurred during a period of price expansion across the industry. Previously, Bitcoin has tended to underperform alts in bull markets, with dominance therefore falling.

One factor in both the rise in Bitcoin dominance and the low market participation across crypto is the impact of the regulatory crackdown in the US. The SEC outlined several coins as securities, including Solana (SOL), Polygon (MATIC) and Cardano (ADA), and while Ripple secured an optimistic ruling in its own case against the SEC, the climate is undoubtedly more uncertain with regard to where all these tokens fit in. 

Bitcoin, on the other hand, has largely been left out of the securities wars, and has even seen a slew of spot ETF applications lodged in recent months. Lawmakers very much seem to be dealing with Bitcoin as a separate genre of asset (as many in the sector have long done). 

The regulatory crackdown on exchanges themselves has also been severe, and has certainly contributed to falling volumes across the space, Bitcoin or otherwise. Both Coinbase and Binance were sued in June, with Binance also the subject of a Department of Justice investigation, with some reports claiming charges may be imminent. 

Moreover, we need to be careful when assessing the apparent trading volumes. One of the (many) accusations in the SEC case is that Binance manipulated trade volumes, meaning the true figures could be even lower. 

Then there is the issue of, even if real, how much volume is meaningful. Binance ceased zero-fee trading for all Bitcoin pairs in March, and before this, zero-fee trading accounted for approximately 75% of volumes on the exchange. After the promotion ended, however, it promptly fell to 36%, with the majority through the stablecoin which Binance continued to promote zero-fee trading on: TrueUSD. Prior to this development, TrueUSD was seldom used with minimal liquidity. 


With the fall in volume, it follows that there is also a fall in volatility. Traders live and die by volatility, and it is closely correlated with volume. In fact, volatility is currently around three-year lows.

The effects of the drain in market participation are being seen on volatility beyond Bitcoin, too. The below chart shows that Ethereum volatility has recently dipped to the level of Bitcoin’s, or even below it. That contrasts with what we have come to expect historically, with Ethereum typically trading with higher volatility than its big cousin. 

The volatility is more notable when considering that liquidity is also so thin. Order books are as shallow as they have been in a long time. Liquidity took a particular fall in November when prominent market maker Alameda collapsed amid the FTX scandal. Since then, not only has its capital not been replaced on order books, but more US market makers have pulled out or scaled back operations in the wake of the regulatory climate. 

All things considered, the crypto markets are showing remarkably low levels of liquidity, trading volume and volatility. This comes via a combination of factors, from investors retreating on the risk curve to other bear market-related factors. Regulation is also a key factor, however, and undoubtedly suppressing market activity while uncertainty is so high. 

The turbulent price action will return. But for now, crypto charts are not throwing up their trademark chaos.

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Coinbase stock: bouncing back but a disaster for investors to date

Key Takeaways 

  • Coinbase went public in April 2021, close to the top of the crypto market and near a $100 billion valuation
  • Despite a stout 141% rise thus far this year, it remains 77% off its IPO price
  • It has underperformed Bitcoin significantly
  • Regulatory issues cloud picture but hope remains that it can establish itself as largest fiat on-boarder

Coinbase stock is having a bumper year. The cryptocurrency exchange is up 141% year-to-date, far exceeding both Bitcoin and the Nasdaq, which have risen 77% and 31% respectively.  This year-to-date gain comes despite a 24% fall over the last month. 

And yet, despite the boisterous performance thus far this year, for those who invested in Coinbase a couple of years ago, it has been nothing but pain. The stock remains 76% below its IPO price from April 2021. At one point flirting with a $100 billion valuation, today it has a market cap of $19 billion. 

The travails of the stock sum up the struggles in the wider cryptocurrency industry over the last eighteen months. Booming during the pandemic as stimulus cheques flowed and interest rates were non-existent, the music stopped last year once inflation began to spiral. Central banks were forced to hike interest rates, with the US Federal Reserve particularly aggressive. Today, rates are north of 5%, with risk assets pulling back severely last year as a result. 

Trouble within crypto

In addition to the harsh macro climate, the crypto sector has done itself no favours. There have been several startling collapses which triggered mass contagion across the industry. The first was the death spiral of the UST stablecoin, taking down the entire Terra ecosystem and leading to a host of bankruptcies, including hedge fund Three Arrows Capital.

Crypto lender Celsius were among the other firms to follow, but it was the demise of FTX, the Bahamas-based exchange, that was the cherry on top. Bitcoin fell to $15,500 and the entire industry was in disarray. For Coinbase shareholders, despite the evaporation of a key competitor, the stock price suffered further, such was the damage to the ecosystem. 

In retrospect, Coinbase went public right at the top, walking into an oncoming storm. Marking their IPO on a Bitcoin price chart below shows how poignant the timing was. 

Yet even with bad timing, it has underperformed Bitcoin. While the two assets have been highly correlated, since the start of 2022 (roughly coinciding with the start of the crypto bear market), Coinbase has headed lower than the world’s biggest crypto. 


A big part of the issue is regulation. US lawmakers are cracking down on the cryptocurrency industry, and Coinbase is squarely in the line of fire. The exchange was sued in June for securities violations. 

“(The SEC) came back to us, and they said . . . we believe every asset other than bitcoin is a security,” Brian Armstrong, CEO of Coinbase, said. “And, we said, well how are you coming to that conclusion, because that’s not our interpretation of the law. And they said, we’re not going to explain it to you, you need to delist every asset other than Bitcoin.” 

“We really didn’t have a choice at that point, delisting every asset other than bitcoin, which by the way is not what the law says, would have essentially meant the end of the crypto industry in the US,” Armstrong continued. “It kind of made it an easy choice . . . let’s go to court and find out what the court says.”

The court case will be pivotal not only for the future of Coinbase’s business, but the entire crypto industry in the US. Yet despite the regulatory troubles, Coinbase is arguably the most reputable major exchange. Its legal trouble centres on securities violations, a far cry from the laundry list of accusations against the biggest exchange, Binance. Changpeng Zhao’s company faces charges of trading against customers, manipulating volume, circumventing AML and KYC laws, and more. 

Institutional on-boarder

Additionally, many of the spot ETF applications which have been lodged with the SEC recently outline Coinbase as a proposed custodian. This, in addition to its cleaner reputation as mentioned above, highlights an angle that Coinbase could exploit if it does manage to fight its corner in court successfully: institutional money. 

If or when institutional capital is allowed to flow freely into crypto, Coinbase – at least right now – appears well placed to vacuum up all that volume and offer as a vital on-boarding into the on-chain world for all this trad-fi capital. 

It is difficult to forecast how the legal case will play out, and in any case, it will not be resolved quickly. On the positive side for COIN investors, last month’s ruling in the landmark Ripple security case provided hope, even if it was only a partial win, with the result also pushed back against by the SEC.

Whatever happens with that case, COIN investors will hope that the future brings more positive results than the past, as the stock has been a disaster for most. Perhaps the best way to sum it up is this: had investors put their money in FTX, and if FTX creditors end up securing 24 cents on the dollar or greater, they would be better off than Coinbase investors. Obviously, that is a silly comparison and assumes Coinbase trades flat from here (not to mention the fact that bankruptcy proceedings will take years), but it does indicate quite how badly Coinbase stock has performed since those dizzying days of 2021. 

The post Coinbase stock: bouncing back but a disaster for investors to date appeared first on CoinJournal.

Does Litecoin’s halving provide clues ahead of Bitcoin’s next April?

Key Takeaways

  • The next Bitcoin halving is slated for April 2024, the fourth of Bitcoin’s existence
  • Litecoin has just undergone its fourth halving, but the price effects of Litecoin halvings in the past have not been as strong
  • Sample size is small meaning it is hard to conclude with confidence whether halvings have tangible price effects in the short-term
  • Bitcoin is a very different proposition to Litecoin, but the price action going forward of the latter will be interesting to track as we approach Bitcoin’s next halving in April 2024

Whether Bitcoin halvings are priced in has become a fervent topic of debate among the community. We put together an analysis of this question a few weeks ago, as we now fast approach the fourth halving of Bitcoin’s young life. 

Slated for April 2024, the halving will cut the Bitcoin block subsidy from 6.25 Bitcoins to 3.125 Bitcoins per block, halving the issuance rate of newly created supply.

We will not rehash (pun intended!) our aforementioned analysis of the upcoming halving here. Instead, we will focus on another coin: Litecoin. One of the world’s first altcoins, it is a derivative of Bitcoin and, intriguingly, just underwent the fourth halving of its life. 

Can Litecoin therefore be seen as a guinea pig ahead of Bitcoin’s own halving next year? Well, not really, but we may be able to gain certain insights. 

First, let us examine Litecoin’s performance through past halvings. Price data is quite illiquid prior to 2015, so the below chart omits the first halving. 

The log scale of the chart somewhat obscures it, but the second halving in 2015 preceded strong price performance for Litecoin. On the other hand, the third halving in 2019 saw falling prices, before the trend reversed after COVID struck in 2020, when the entire crypto sector surged into the mainstream. 

It is too soon to draw conclusions regarding the fourth halving, which occured just over a week ago on August 5th. Nevertheless, Litecoin’s halvings don’t offer compelling evidence of a strong relationship thus far at least. Furthermore, like most questions in crypto, the sample size is so small that even if they did precipitate aggressive price rises immediately, that would not necessarily mean there is causation.  

Bitcoin is not Litecoin, but again, we may be able to derive clues from the pattern in ascertaining the effect of halvings on the former, even if we can’t be confident given the sample size issues. First, let us now look at Bitcoin’s price action while marking the halving events:

The pattern is clear. Typically, we have seen outsized volatility in the months leading up to a halving, before strong outperformance on the other side. The outperformance has also grown smaller with each halving, perhaps unsurprising given the market cap has grown so much in the four years between each event.  

So, why has the effect of halvings on Bitcoin been, at least optically, larger than the same events on Litecoin? The first theory takes us to the heart of the debate on whether halvings are really priced in: while previous events have preceded steep inclines for Bitcoin, they have also lined up well with global liquidity cycles. 

The below chart from Fidelity shows this well. There is perhaps no greater influence on the valuations of risk assets than central bank balance sheets, and the halvings have lined up incredibly well with the expansion of those same balance sheets. 

The thing is, the next halving could well line up with an expansion in liquidity again. The previous eighteen months have seen one of the fastest rate-hiking cycles in recent history, with the Fed funds rate now above 5%. Now, looking at probabilities implied by the futures market, the market is anticipating that the hikes are coming to a close (if they haven’t done so already). 

Looking further forward towards the time period around the halving (April), futures imply that rate cuts could come into play. Not to mention, when we look at the yield curve, it is currently at the deepest level of inversion since the early 80s. The bottom line is this: the fourth halving, through sheer chance, could again line up miraculously well with global liquidity cycles. 

Of course, the macro situation has been changing incessantly, and there is every chance that forecasts around the liquidity cycle could flip, and the halving won’t line up as well as it has done in the past. 

This is where Litecoin may come in. With its halvings landing at different dates to Bitcoin in the past, yet not boosting prices as much as the orange coin saw, perhaps it is just a timing thing, whether macro-related or other? Looking at Litecoin’s price action compared to Bitcoin, the duo are tightly correlated, like many altcoins in the space. If Litecoin’s halving does not cause a slight outperformance this time compared to Bitcoin or other coins, what would be the explanation? 

Ultimately, like we keep saying, the sample size is small. Bitcoin has only experienced three halvings, and one could even argue that it was only the recent event in 2020 that occurred while the asset was trading with sufficient liquidity. 

Litecoin’s less explosive price action after its own halvings do perhaps throw further doubt on the theory that a 50% cut to the new supply issuance will inevitably kick up the price. And yet, Litecoin is not Bitcoin, so the debate will rage on. 

Either way, revisiting Litecoin’s price performance around the time of Bitcoin halving will be interesting, because by then it will have had around eight months post-halving and may present a more relevant reference point.

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Only 8% of people are familiar with Web3 – what has happened?

Key Takeaways

  • Google search interest in the metaverse is down 92% from its peak, highlighting the fall from grace for the concept
  • 92% of respondents globally said that they have heard of crypto, but only 8% considered themselves to be very familiar with the concept of Web3
  • Web3 often has trouble defining exactly what it is, with abstract and shifting goals frequently changing with time
  • Collapse of token economy and pullback in wider crypto space has curtailed enthusiasm
  • Web3 is not the metaverse, but there are valuable lessons to be had for tokens with regard to lofty goals and abstract descriptions 

Lockdowns, stimulus packages, social distancing – the year 2021 could not seem more different when looking back on it today. 

The same holds true within crypto. The year saw Bitcoin sail past $68,000, El Salvador declare the orange coin as legal tender, cartoon monkey pictures sold for millions of dollars, and a doggy token by the name of Dogecoin at a valuation of $88 billion.

Among the hysteria, a virtual world was touted more and more as the future. A future world where everybody could work, hang out and more, built on top of blockchain rails. They called it the “metaverse”. The only problem is, that clamour has become a whisper, as data for the search term “metaverse” on Google shows below, which is down 92% from its peak. 

Web3 has also pulled back

While the metaverse may be low hanging fruit to target, the more ubiquitous- and somewhat related – concept of Web3 has also struggled to maintain the excitement levels of the pandemic. 

Despite lofty predictions that Web3 was on the verge of a parabolic rise, in a recent survey conducted by YouGov and Consensys, the results suggested this was nowhere near. While 92% of respondents globally said that they have heard of crypto, only 8% considered themselves to be very familiar with the concept of Web3. 

With so many aware of crypto yet so few familiar with what Web3 is, it may suggest two things. The first, quite simply, is that Web3 has had trouble catching on; the results not delivering on the lofty promises, the protocols struggling to deliver utility amid a declining crypto environment. 

The second is a long-running criticism of Web3; namely, it has trouble defining exactly what it is, at least without venturing into an overly abstract realm. 

Interestingly, the same survey indicated enthusiasm around solving problems which proponents of Web3 claim it aims to fix. For example: 

  • 79% want more control over their identity on the Internet
  • 83% think data privacy is important
  • 67% believe they should own the things they make 

For some enthusiasts, this may be optimistic, as it highlights interest in the problems which Web3 aims to solve and an inevitable target market. And yet, in another way, it sums up the exact problem. These issues are extremely broad and vague. In a survey, it is not surprising that the majority say that they believe they should own the things they make, or that data privacy is important. 

Just because people are interested in these things does not necessarily mean that Web3 protocols built with the supposed goals of tackling these “problems” will succeed. As we have seen, once token prices fall, the climate shifts rapidly. 

Facebook rebranding to Meta sums up struggles

Perhaps there is no better way to sum up the popping of the bubble quite like Facebook’s decision to rebrand as Meta. On last month’s earnings call, CEO Mark Zuckerberg was forced to outline that the company’s determination to focus on the metaverse remains intact. 

“We remain fully committed to the Metaverse vision as well,” Zuckerberg said. “We’ve been working on both of these two major priorities (AI and the metaverse) for many years in parallel now, and in many ways the two areas are overlapping and complementary.”

Meta’s metaverse ventures have hurt shareholders. Last year, its Reality Labs unit, in charge of the Metaverse project, lost $13.7 billion. The year before, a further $10.2 billion was lost. 

“I can’t guarantee you that I’m going to be right about this bet. I do think that this is the direction that the world is going in,” Zuckerberg added. 

Thus far this year, Meta has performed strongly in conjunction with the bouceback in the tech sector. However, the rebound comes after the stock significantly underperformed the Nasdaq, with the underperformance widening after the company’s Meta rebrand in October 2021 (not that it is necessarily indicative, but it is interesting all the same). 

Looking back, the timing of Meta’s rebrand was unfortunate. Its public commitment to the metaverse and company name change came on October 28th 2021, only thirteen days before the Bitcoin price peak and the pinnacle of the COVID-driven crypto bonanza.

Of course, the pertinent counterpoint of this is that Meta represents the exact antithesis of what many Web3 believers desire. A dominant big tech company with a questionable history and public image, to say the least. And besides, the metaverse is not Web3 – although this inability to define it in tangible and actionable terms is part of the issue. 

Obviously, the entire crypto sector is hurting badly, not just metaverse and Web3 tokens. Bitcoin remains over 55% off its high. The macro environment has been problematic and risk assets have struggled across the board, with interest rates hiked north of 5% following so many years of treading water near zero.

In a more direct comparison, even interest in Bitcoin from the mainstream is down, with search volume for Bitcoin falling to two-year lows. And yet the damage with regard to the metaverse has been worse. Looking at the coins classified as metaverse on CoinMarketCap, the top currencies are all down at least 84%, with an average 92% drop.

It’s been a rough ride for all of crypto. But for metaverse, it has nearly decimated the still-nascent concept. While the metaverse is not Web3, there are many tokens and projects leaning on the promises of the latter while creating nothing of genuine utility. For the projects still around in the space, examining the travails of metaverse coins could be a valuable lesson. 

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Consensys and YouGov survey Link

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How rising Bitcoin dominance invalidates many crypto assumptions

Key Takeaways

  • Bitcoin dominance has risen above 50%, having started the year at 42%
  • Traditionally, dominance falls while market prices are rising in the sector, marking the year 2023 out as unusual 
  • This hammers home how Bitcoin is still finding its feet, and why prudence needs to be taken when extrapolating past performance to the future
  • Bitcoin was only launched in 2009 and had minimal liquidity for the first few years, meaning our sample space of data is too short to make assumptions solely based on the past

Bitcoin dominance, which measures the ratio of the Bitcoin market cap to the entire cryptocurrency market cap, has clambered back above 50%. With the period of relative serenity in the crypto markets recently, it has been rangebound for the last two months, although dipped to 49% last week.

However, the dominance of the world’s biggest crypto has surged since the start of this year, having been in the low 40’s as the book was closed on the year 2022. 

The increase is the biggest prolonged expansion in Bitcoin dominance since 2019, when it rose from 53% to 72% in a five-month period beginning that April. 

Notably, the rise of Bitcoin’s dominance this time around contrasts with what we have seen in the past regard the timing of cycles. Despite its extreme volatility when comparing to other major asset classes, Bitcoin can generally be viewed as the lowest-beta option within digital assets.

In previous cycles, the dominance has hence tended to fall in bull markets as altcoins outpace Bitcoin’s gains. The pattern has tended to be as follows:

  • Bear market
  • Bitcoin rises, dominance jumps 
  • Altcoins rise more, dominance falls

This time around, the altcoins have not fulfilled their end of the bargain. 

Crypto market is changing fundamentally

There are a few theories which spring to mind to explain these occurences. The first is that Bitcoin is separating itself from the rest of the crypto market. Regulation is one factor here – Bitcoin has proven to be more immune than many other coins in the space, many of whom have been weighed down by the crackdown in the US around securities laws. 

The SEC explicitly named many tokens as securities, including SOL (Solana), MATIC (Polygon) and ADA (Cardano). While Ripple won a landmark case (at least partially) against the SEC last month, providing hope for the future legal path of these proceedings, the intense hostility shown by lawmakers in the US has undoubtedly served to dampen token prices. Bitcoin, however, seems to be in its own genre, targeting “commodity” status rather than a security.

Then there is the elephant in the room: all the sordid activity that has taken place in the crypto industry over the past eighteen months. From the Terra death spiral to the Celsius scandal to the FTX “deceit”, crypto has taken a beating. This has undoubtedly affected Bitcoin too (as its price chart will so obviously indicate), but it is fair to say that the part of the crypto space that lies further out on the risk curve may find it harder to regain trust from institutions and trad-fi actors (or to win it to begin with, if it never had it in the first place). 

Many have always argued that Bitcoin is separate from the rest of crypto, so much so that the faction who advertise this aggressively have been labelled with the moniker “Bitcoin maximalists”. As least as far as regulation goes, it seems lawmakers may be coming around towards also separating out the asset from the rest of the crowd. 

Bitcoin has suffered immensely in the last year, however less so price-wise than other coins, while its network has remained online, always, without a hitch. There are many other cryptos who can argue the same, but whether fair or unfair, they may be getting caught up in the reputational crossfire a little more than Bitcoin is. 

Beyond these speculative theories, perhaps the greatest lesson of all is to be aware of how fickle many of the trends within the crypto are. Are we really surprised that Bitcoin dominance has risen and altcoins have not caught up as the positive sentiment continues? Why? Because of history?

Let us remind ourselves that “history” pertains to barely a minute here. Bitcoin was launched in 2009, and didn’t trade with any sort of genuine liquidity until perhaps 2015 (if even). Altcoins were even later. The sample size which we have to work with here is far too small to make any sort of concrete conclusions. Compare this to the stock market, or bonds, where we can make all sorts of return and risk assumptions to fit nicely into our Black-Litterman models or so forth. 

Not only is the sample size small, but the timing is important, too. Bitcoin was borne out of the embers of one of the greatest crashes in economic history, launched two months before the stock market bottomed in March 2009. Following those tumultuous years, we embarked upon one of the longest bull markets in history. Risk assets went parabolic as generationally-low interest rates fuelled dizzying gains. 

Therefore, until last year, Bitcoin – and crypto – had only ever experienced a low-interest rate, free money economy of up-only risk assets. I have spent a lot of time having fun with Bitcoin models, and my number one takeaway is that, quite simply, we don’t know. 

The world is still figuring out what cryptocurrency is. One day, we will know exactly how to model this thing, just like pension funds know exactly how to apply Markowitz theory to stock/bond portfolios. There will come a day when an efficient frontier portfolio has magic Internet money in it. 

But we aren’t there yet. Hence, we can certainly lean on the past few years for guidance, but putting too much weight into this incredibly short and bespoke period (which also included a once-in-a-lifetime pandemic that saw the global economy abruptly lock down) would be misguided. 

Perspective is needed. And we don’t have a good enough viewpoint yet to get that perspective. 

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What will happen to Ethereum’s staking yield?

Key Takeaways

  • Ethereum completed its long-awaited Merge upgrade in September 2022
  • Stakers are currently earning approximately 4% APY from their Ether tokens
  • 19% of the total Ether supply is staked, the lowest ratio of any of the leading coins
  • Staking rewards are divided among stakers, meaning the APY earned decreases as more users stake
  • Demand on the network increases gas fees and ultimately contributes to more APY, meaning there are several factors at play when trying to assess where the yield may land
  • All in all, it remains up for debate as to where the yield is headed, despite many analysts predicting basement-level yields of 1%-2% are inevitable


The fundamentals of Ethereum were entirely transformed in September 2022 when the Merge went live, the blockchain officially becoming a proof-of-stake consensus. The implications for this are many, however one of the more fascinating aspects is that investors can now earn a yield from staking their Ether tokens.

Let’s dive into how popular staking has been, where it’s trending going forward, and speculate about where the all-important APY may land.

Ethereum stakers are increasing

Ethereum staking has proved wildly popular. There is currently almost 18.75% of the total supply staked. The below chart from CryptoQuant shows that not only has the increase been consistent, but the rate of increase has steepened noticeably since the Shapella upgrade in April.

Shapella finally allowed staked Ether to be withdrawn, with some early stakers having had tokens locked up since Q4 of 2020. There was hence some concern that Ether would be withdrawn en masse once the Shapella upgrade went live, the subsequent sell pressure bound to dent the price. Not only has this happened, but staking has only become more popular since the upgrade.

Despite the popularity of Ethereum staking, and the lack of withdrawals sparked by Shapella, the network’s staked tokens as a percent of the total supply still pale in comparison to other proof-of-stake blockchains.

The chart below highlights Ethereum in yellow, its 19% ratio far below the other major proof-of-stake coins. Assessing the rest of the top 10 by staked market cap, these coins average a 53% stake ratio, with only BNB Chain remotely close to Ethereum, sitting at 15%.

If we then shift the chart to assess the total market cap of the staked portion of coins, Ethereum’s dominance is clear. Its 19% staked tokens carry a value of $43 billion – more than the other nine cryptos’ staked market caps combined.

Ethereum’s low staked ratio implies that it should have more, at least if other coins can be used as a benchmark. This is especially true when considering recent bullish developments on the Ethereum network which suggest it may be solidifying its place as the market-leading smart contract platform. Most notable of these could be discussion around potential Ether futures ETFs, as well as the announcement that PayPal is launching a stablecoin on the network this week.

So, what happens to the staking yield if the amount of staked Ether does indeed continue to increase? Remember, the total annual yield paid out to stakers is calculated as follows:

[(gross annual ETH issuance + annual fees*(1-% of fees burned)]

These total staking rewards are then divided by the average ETH staked over the year to commute the APY.

In other words: The amount of ether staked is in the denominator of the fraction. So as the amount staked gets bigger, the APY shrinks. This effect can already be seen in what has happened to date. Analysts had predicted a yield of 10%-12% ahead of the Merge, however today it is closer to 4%.  And that is 4% with its staking ratio completely out of whack compared to other proof-of-stake coins, as mentioned above.

What happens next?

With the amount of Ether staked increasing incessantly, is the yield therefore primed to collapse?

Some analysts believe it is headed towards 1%-2%; some even think less. The reality is that nobody really knows because, as always, demand relies on a variety of factors.

We need to remember, as we often say in these columns, that speculating on the future of crypto is so difficult because we have such little data to work with. This is true for Ethereum as a whole, which only launched in 2015, but especially so regarding the yield, as the Merge has only been live since September (or since April if you count the “true” completion date as post-Shapella).

Hence, it is a challenge to forecast the staking yield going forward. We have focused on the impressive growth of staking thus far, and while this will drive the yield down, demand on the network will increase the numerator of the aforementioned formula and kick the yield up.

Indeed, looking at total transactions, the rate has been quite resilient throughout the last eighteen months, despite the bloodbath in the sector last year.

Then again, crypto is changing quickly. It remains difficult to foresee how regulation, infrastructural development (restaking and Eigeanlayer spring to mind as an example) and the macro landscape, just to name a few factors, will affect the climate going forward.

Speaking of macro, there is also the matter of trad-fi yields. Currently, the Fed funds rate is 5.25%-5.5%, having been near-zero prior to March 2022. Backing out probabilities from Fed futures implies the market is expecting the end of the cycle is near. Not to mention, with the mammoth amount of debt in the current system, rates cannot stay high forever.

Could falling trad-fi yields affect demand for staking yield? Perhaps – while it is hard to separate the overall liquidity drain and suppressing of risk assets that occurs out of hiked rates, the superior (and risk-free) return is definitely a key reason why capital has flooded out of DeFi in the last year. While previously-dizzying DeFi yields have collapsed, trad-fi yields have rocketed as the Federal Reserve has scrambled to rein in rampant inflation.

Furthermore, if yield does fall down towards 1%-2%, stakers could begin to pull out and search elsewhere for income. This would therefore create a reflexive relationship with regard to the yield.

All in all, it remains too early to speculate about where the Ethereum staking yield is ultimately headed, at least with any degree of confidence; it depends on too many factors and the sample space is too brief to date. It does seem likely, if not inevitable, that the yield will decline to some degree, but the question of how much is a difficult one to answer. While many are adamant the APY will cascade downwards to uber-thin levels – and for the avoidance of doubt, it may do – we have presented here at least some points of consideration as to why the situation may not be as clear cut.

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Ethereum remains top dog, but woes persist in the DeFi sector

Key Takeaways

  • DeFi has seen massive capital outflows in the last year as token prices have collapsed
  • Trad-fi yields have also spiked while DeFi yields have fallen
  • Ethereum has underperformed Bitcoin notably since the Merge

The third quarter of 2020 became known as “DeFi Summer” within crypto, such was the speed at which the nascent sector of decentralised finance took the industry by storm. 

Fast forward three summers and it is safe to say that the 2023 edition will not be given the same moniker. After a torrid year in 2022, crypto has rebounded strongly thus far this year; however, DeFi has been left out in the cold, the summer sunshine nowhere to be seen. 

The below chart shows the TVL across the space. From a peak of nearly $180 billion in November 2021, it currently sits at $40 billion, representing a drawdown of nearly 78%. 

Ethereum remains the home of DeFi

Let’s dig into Ethereum specifically. The network has undergone some important milestones in the last year. The most meaningful was the Merge in September, which transitioned Ethereum to proof-of-stake from proof-of-work. This was then followed up with the Shapella upgrade in April, finally allowing all staked ETH to be withdrawn and closing the book on the biggest (and highly successful) network event since its launch in 2015. 

Both before, during and after these changes, Ethereum has remained the king of DeFi with a chunky 57% of TVL in the space, Tron a distant second with 14%. 

However, Ethereum has not been immune to the outflows which have ravaged DeFi. While market share has remained high, TVL itself has fallen akin to what has been seen across the ecosystem. It is also important to note that the previous outflow of TVL was described in dollar terms. This is despite the fact that much of the TVL in DeFi is denominated in non-fiat currencies, such as ETH itself or myriad ERC-20 tokens.

Hence, even if no withdrawals took place, the TVL in dollar terms would have plummeted by virtue of crypto prices cascading downwards last year. Even after the bounceback in 2023, Ether is currently trading at $1,800, 63% off its all-time high. Yet displaying the withdrawals in terms of Ether below shows that the downward trend is visible regardless of denomination. 

This begs the question, why? Well, the obvious answers are plenty. Namely, crypto has been put through the wringer over the past couple of years, from Terra to FTX to the SEC and everything in between. While many of the transgressions have centred on CeFi rather than DeFi – indeed, one could argue that DeFi performed exactly as it meant to do (Terra aside…) – crypto has been hurt immensely overall, nobody spared. 

Having said that, DeFi has recently suffered a little bit of a wobble…

Although the reasons for capital flight run deeper than crypto. The macro environment has flipped to a staggering degree. Following years of uber-low interest rates, the Federal Reserve was forced into a series of relentless interest rate hikes as inflation spiralled. While it has begun to come down and the market has bounced off the hope that we are nearing the end of the cycle, DeFi has been squarely caught in the crossfire. 

Not only do higher interest rates suck liquidity out of the economy and cause investors to retreat back on the risk curve, hence crashing crypto prices, but they also offer investors an alternative method of earning yield. 

We are now in a situation where the Fed funds rate is above 5%, having been close to zero only eighteen months ago. At the same time, yields that were previously sky-high within crypto have proven unsustainable as token prices have dropped, meaning that DeFi yields have collapsed while trad-fi yields have soared. It’s not a surprise, therefore, to see capital flow out at such a scale. 

Positive signs remain

This is all rather negative, but there is light amid the darkness. Ethereum has fared far better than many of its rivals. Take Solana, once deemed the most notorious “ETH-killer”, its associations with Bankman-Fried, repeated outages and various other struggles ultimately kneecapped it to the tune of a 97% peak-to-trough decline (it remains 91% off its all-time high). While Solana is the most glaring example, Ether has been resilient by comparison to many of its rivals. 

Additionally, the aforementioned Merge came and went smoothly, a phenomenal undertaking by the developers and a win for the community at large. Adding in the recent slew of applications for an Ether futures ETF and, if the regulatory climate finally starts to clear up, there could be more reasons to be optimistic for DeFi and Ethereum. 

However, there is no denying that it has been an eye-opening period for many in the DeFi space, some of whom speculated that Ether would flip Bitcoin as the world’s largest cryptocurrency by market cap. Quite the contrary. In fact, Ethereum has underperformed Bitcoin immensely since the Merge last September, notable despite the crypto market trending upwards since Q4. 

A market heading north has generally meant that Bitcoin underperforms, however the precedent has been different this time, as discussed here (in short, regulation driving a wedge between Bitcoin and the rest of the market, the spot ETF applications, the scale of the damage within crypto, and the fact that we tend to draw far too much from past performance in a sector that has so little data to work with). 

Unquestionably, it has been the toughest year in DeFi’s brief existence so far. And yet, Ethereum trucks on, eagerly striving to tokenise real world assets and start generating real world value. Its place at the top among the smart contract blockchains appears secured. It just needs to hope DeFi makes a comeback, and that the summer of 2020 was not a once-off event. Time will tell. 

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Bitcoin volume falls to 3-year low as summer activity sags

  • Crypto volumes are sagging amid summer lull
  • In dollar terms, the amount of Bitcoin moving on-chain is at three-year lows
  • Trading activity commonly dies down in trad-fi markets at this time of year
  • However, falling crypto volumes have been realised consistently over the last year, while the dropoff has been starker than other asset classes

On-chain activity is rather muted right now. The seven-day moving average of transfer volume on the Bitcoin network is currently at its lowest level since August 2020. 

On the one hand, the falling volume represents a traditional summer lag in trading activity. However, the lowly activity is not far out of place with what we have seen thus far this year, with liquidity and volume markedly lower since the FTX collapse in November. 

Looking at dollar volume, as per the above chart, also takes into account the rampant volatility in the BTC/USD price over the years. If we assess activity in BTC terms, the dropoff is even more stark. Measuring in Bitcoin, the seven-day moving average is it at its lowest point since 2014, when Bitcoin was a niche Internet asset trading for a few hundred dollars.

The dropoff is not limited to Bitcoin. Crypto exchanges have seen volume decimated in the last couple of years. According to data from the Block, there was $984 billion of trading volume in March 2022. Last month, that figure read $413 billion, a fall of 58%. The chart shows the aggressive spike up in 2021, followed by a long and steady downtrend to today.

This follows in line with the shift in monetary policy. The $984 billion of trading volume in March 2022 came in the same month that the Federal Reserve first hiked rates. Since then, the increases have come thick and fast, with investors dumping risk assets relentlessly.

While there has been a bounceback this year as inflation has cooled and optimism over the end of the tightening cycle approaching picks up, prices remain far below the peaks of 2021. So too do volumes, liquidity and overall activity in the space. 

“The pace of interest rate rises from the Federal Reserve has been relentless”, says Max Coupland, director of CoinJournal. “This impacted risk assets across the financial landscape last year, and of course crypto prices are an obvious reminder of this. But while prices have begun to bounce back in 2023, volumes and liquidity in the industry are still trending down, to the point we are now at levels last seen in 2020”. 

It’s hard to understate how much of an impact the collapse of FTX in November had in this area. Sister firm of the fallen exchange, Alameda Research, was one of the biggest market makers in the space; with its demise, there is a massive hole in order books that has not yet been filled.

The other big push factor for many has been regulation. We saw prominent market makers Jump Crypto and Jane Street announce a scaling back of their operations earlier this year as US lawmakers put the squeeze on the industry, while last month both Binance and Coinbase were sued by the SEC. 

On a positive note, derivatives have not seen quite as stark a dropoff in liquidity. Looking at data from The Block, we see the spot-to-futures volume ratio has fallen sharply in 2023, having risen in the second half of 2022. 

However, there is no denying that on an overall basis, liquidity and volume in the space are declining. Prices remain far below the mania of the bull market, regulators are squeezing hard, and people are now going outside to touch grass, in contrast to a big portion of the bull market when the COVID pandemic locked everybody in without much to do beyond trade some of these funny things called caryptocurrencies.

There is also the reputational damage suffered by the space, and it doesn’t feel too outlandish to speculate that some users simply grew tired of all the shenanigans. But while Bitcoin transfer volume falling to three-year lows is ominous, this is the middle of summer and hence a lag in activity is to be expected. As a result, we may see volumes pick up a tad after summer. Even if this is the case, the scale of the capital outflow has been remarkable, and crypto has a long way to go yet before getting back to the good old days, a.k.a. 2021 – at least as far as liquidity and on-chain volume goes.  

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Crypto’s correlation with stocks rising again following temporary deviation

Key Takeaways

  • Crypto had moved in line with stocks and other risk assets throughout the interest rate tightening cycle
  • This relationship weakened in June amid the crypto regulatory crackdown
  • The correlation has recently picked up again, however
  • Going forward, relationship may change again as the market anticipates the tightening cycle is coming to a close

We know that within the digital asset space, the different cryptocurrencies are highly correlated. As a generalisation, it is fair to say that many altcoins tend to trade like levered bets on Bitcoin. 

Going beyond the asset class and assessing correlations with other asset types becomes more interesting. One of the most intriguing trends to track is the correlation between Bitcoin and stocks. If we want to assess Bitcoin through a macroeconomic lens, its relationship with other asset classes is of vital importance. 

The last eighteen months have thrown this relationship into a new light, as correlations have been extremely high amid one of the fastest interest rate tightening cycles in recent history. With liquidity sucked out of the economy, risk assets were hammered last year, including Bitcoin. 

Compared to the tech-heavy Nasdaq, Bitcoin’s correlation has been persistently high throughout this period, bar a few noticeable instances. As displayed on the below chart from an analysis we compiled six weeks ago, the collapses of Luna, Celsius and FTX saw deviations in this relationship. 

These explain themselves, as dramatic crypto-specific episodes that had no effect on stocks. However, the more recent deviation was bigger than any: coming in June amid the regulatory crackdown (chart is taken from June 15th, a week after the Binance and Coinbase lawsuits). 

In fact, this deviation brought the Nasdaq’s correlation with Bitcoin to a five-year low. If we now re-run this chart, we see the correlation has picked back up again, rising to 0.5 and trending upwards.


This highlights what we already knew: the deviation is only temporary. It came following a month where the Nasdaq jumped 10% off softer forecasts around the future path of interest rate hikes, while Bitcoin fell 9% over the same time period as lawmakers tightened their squeeze on the industry, suing the two largest exchanges and confirming several tokens constituted securities.  

The climate has picked up for crypto since. Ripple won an important case (or, partially won, but the result was undoubtedly positive for the space), while a slew of spot ETF applications have also served to increase optimism. 

While the deviation was always going to be temporary, going forward in the medium-term, things could get more interesting. This is because, finally, the market is anticipating that the majority of interest rate hikes are in the rearview window, with perhaps only one more still to be endured, if even. 

This could release the shackles which have been around Bitcoin’s ankles, and it remains to be seen how the asset will henceforth move in relation to the stock market. We know that the correlation picked up as soon as the Federal Reserve began hiking interest rates; correlations go to 1 in a crisis, and there is a flight to quality – risk assets suffer in that scenario, and that is exactly what we saw. 

There is every chance that both stocks and Bitcoin will continue to trade in tandem, but if/when this tightening cycle ends, it will at least give the market a fresh opportunity to trade them whilst global liquidity is not being pulled off the table. 

Regardless of the relationship between the duo, the below chart shows just how dependent Bitcoin has been on yields – the two-year treasury yield, plotted on an inverse scale, has moved exceptionally closely with Bitcoin, ever since the latter’s all-time high in November 2021. 

How will Bitcoin’s relationship with gold change?

It is Bitcoin’s relationship with gold that provides an equal amount of intrigue, given the former’s designs on becoming some sort of digital equivalent of the latter. Should Bitcoin become a store of value, it will need to become a little more boring with regard to price movements – something gold is well known for. 

However, correlation between the two assets has dipped, moving in the opposite direction to that of stocks. From rising markedly this year, it has fallen sharply in the last month. 

If Bitcoin is to achieve what so many want to do – become an uncorrelated asset capable of offering a portfolio hedge properties – it must flip the script here. Its relationship with stocks will need to loosen, while it will need to get closer to the way gold trades. 

Having said that, Bitcoin has been around only 14 years, and has traded with reasonable liquidity for far less than that. It is still finding its feet, and it remains early – certainly compared to gold, which has been around for thousands of years. 

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Bitcoin volatility at three-year low as crypto markets lull

Key Takeaways

  • Crypto volatility has been dropping all year, with Bitcoin’s volatility now at three-year lows
  • Volume is also dropping, as the calm markets are not welcomed by traders
  • Despite downward-trending volatility, crypto remains highly volatile when compared to other asset classes

Crypto markets are known for violent volatility, capable of both spiking and collapsing in the blink of an eye. 

Thus far this year, however, that hasn’t been the case. Volatility has been trickling steadily downward across the space. Assessing the realised volatility of Bitcoin over a rolling one-month window, the metric is currently at a three-year low. 

This comes despite Bitcoin having had a bumper year thus far, the asset currently up 76%, treading water around the $30,000 mark. In the past, Bitcoin has oscillated wildly, but this run-up from the low of $15,500 late last year has been distinguished by a steady climb rather than the turbulent ups and downs we have come to expect. 

The pattern is not unique to the world’s biggest crypto, either – volatility is falling across the board. The easy way to illustrate this is by looking at Ether. Historically, the price of ETH has been more volatile than BTC, but the divergence has narrowed this year, and Ether is now trading with similar volatility to its big brother. 

This relative calm in crypto markets is good on one level, given one of Bitcoin’s most-cited criticisms is its extreme volatility, which most agree it will need to overcome should it ever take the status of a reputable store of value. 

Not everyone is a winner, though. Traders rely on volatility and hence these serene times are not exactly a boon. If we look at spot trading volume, the drawdown has been steep. Granted, there are myriad factors at play here, including regulation, a drawdown in prices, lockdowns ending, scandals (FTX and the SEC lawsuits) and so on, but the lack of volatility is not helping. 

The below chart from The Block shows quite how far spot volume has fallen. 

Even derivatives trading volume, which had been more stout, has fallen off since April – likely a better gauge for traders than assessing spot volume. Liquidity is not as much of a concern in derivatives markets as it has become in spot markets, but the last few months have begun to see some thinning out there, too. 

While the falling volatility is notable, it should be noted that crypto remains a league above trad-fi markets with regard to this metric. Even this three-year low still translates to an annualised volatility of 25% for Bitcoin, which would not be deemed low-risk by any stretch of the imagination. 

To put this up in lights, comparing Bitcoin to gold is always illustrative. Gold is the store of value which has been around for thousands of years, the shiny metal known for its inflation-hedging abilities and lack of correlation to risk assets. For many, Bitcoin’s vision is to claim the title of some sort of digital gold. 

The below chart displays the current gulf between these assets – even after the dampening down in crypto volatility this year, it’s on a completely different planet to gold. 

Alternatively, one can simply compare the daily returns of the assets, which conveys the same thing. 

Thus, while crypto volatility is currently sluggish, it has a long way to go before it matches gold. More importantly, there is no guarantee that this volatility will stay low. Quite the opposite – given the low liquidity in the space, less capital is needed to move crypto markets than has been the case previously. 

In light of this, it feels like the downward trend in volatility (exacerbated in the last couple of months by a classic summer lull in trading) should return. Not to mention the fact that with the interest rate hiking cycle coming to a close, markets could be at an inflection point. It is always hard to predict the future in crypto, but it feels unlikely that digital assets’ volatility will stay at these uncharacteristically low levels for long. 

The post Bitcoin volatility at three-year low as crypto markets lull appeared first on CoinJournal.

A temperature check on crypto as market eyes end of rate hiking cycle

Key Takeaways

  • The Federal Reserve increased interest rates 0.25% Wednesday, but the market is anticipating the hiking cycle is coming to a close
  • Optimism is flowing in crypto markets, which saw crushing losses in 2022 as rates rose swiftly
  • While the Fed has said it no longer forecasts a recession, this could be a double-edged sword for crypto
  • Fed may be reluctant to cut rates, instead electing to for the higher for longer approach, something which could restrain crypto
  • Employment is at half-century lows, wage pressure remains and core inflation has been stickier than the headline number
  • Overall, macro environment is far brighter than nine months ago, but caution may be prudent for crypto investors despite market-wide sentiment spiking rapidly

Following the latest 25 bps increase to the federal funds rate Wednesday, which was widely anticipated ahead of time by the market, the most important interest rate in the economy is now a remarkable 525 bps above where it was prior to March 2022, when the Fed first hiked rates.

Finally, after a relentless liquidity squeeze, the market is anticipating that the end of the road may be nigh. For Bitcoin investors, this is music to their ears. Or at least that is what many in the sector are currently proclaiming. The only thing is, the true story may be a bit more convoluted. 

Bitcoin has moved with yield expectations

Firstly, it is unquestioned that the transition to a higher yield environment has been a death wish for crypto. As inflation became rampant last year and we transitioned to a new paradigm of tight monetary policy after a decade of essentially-free money, digital assets were crushed. Liquidity was sucked out of the entire system, hurting assets which reside on the long end of the risk spectrum the most. And that is certainly where crypto has set up shop in its brief existence thus far. 

The below chart shows this as well as any. Plotting the two-year treasury yield, which moves with rate expectations, on an inverted axis against the Bitcoin price shows how much the latter has dipped in line with the rise in yields. And we know that where Bitcoin goes, crypto tends to follow. 

The optimism being spouted about now is centred on the hope that much-coveted rate cuts are imminent. Yet there is reason to believe that this may still be premature, for a number of reasons. The bulk of Powell’s comments from Wednesday’s meeting can be dismissed as diplomatic answers structured to leave the Fed with as much optionality as possible going forward, but one admission was notable: the revelation that the Fed is no longer forecasting a recession.  

“So the staff now has a noticeable slowdown in growth starting later this year in the forecast, but given the resilience of the economy recently, they are no longer forecasting a recession,” Powell said. 

While this may sound like good news – and it is! – this also means that, perhaps counter-intuitively, Bitcoin may not have quite the boost behind it that it may have otherwise hoped for. The reason is that, if we go back to Economics 101, the Fed utilises rate cuts to stimulate a sluggish economy. If a recession is no longer anticipated, it is less likely these cuts will come.

The Federal Reserve has been extremely reluctant to cut rates in the last few decades unless explicitly forced to, such as when the economy went into a tailspin as the COVID pandemic suddenly emerged in March 2020. If we view the below chart, showing the fed rate all the way back to 1990, we see that without a recession, the administration has been cautious for the most part. And with inflation remaining higher than its 2% target, it feels ambitious to assume it will change that approach anytime soon. 

While rate hikes may be coming to an end, rate cuts don’t feel like they will transpire anytime soon. 

This thought is reinforced when digging into the numbers underlying this unique current macro situation. While the headline figure of 3% inflation is drawing all the attention, the core number is perhaps the better gauge; this strips out the volatile effects of food and energy and can be more relevant for the Fed’s policy decisions. Looking at this core number, it has dropped only 110 bps in the last year and remains at a stout 4.8%. This contrasts with a fall of 690 bps in the headline figure over the same period. 

Not to mention that with the way the CPI is structured as a YoY number, we are into the stage of the year where inflation was always going to fall. This is because there were such hot readings landing at this time last year, when energy prices were sky-high and inflation came within 10 bps of hitting double digits. These readings dropping out of the index creates a more dramatic reduction in the YoY number. 

While 3% may sound close to 2%, this difference also remains a chasm, should the Fed remain determined to get back to its original target. Jim Bianco, speaking to the On the Margin podcast this week, had a good way of explaining why this matters.

“The Fed would tell us that the neutral funds rate is half a percent above inflation…so if the long-run (inflation) rate is 3% (as opposed to 2%), the neutral rate is 3.5%, so they are 200 bps above that (at the current fed rate). When the yield curve normalises out again, it should be positive 150 bps – that is historically where it has been. 

With a 150bps spread on the yield curve, he concludes that the 10-year yield must be at 5% to be neutral. Currently, the 10-year yield is at 3.9%, meaning via Bianco’s summation, rates would need to come up 110 bps to hit the Fed’s notion of neutrality under a 3% inflation target regime. This illustrates how the journey to 2% remains important, should that still be the Fed’s target (which Powell has adamantly repeated it is). 

Lagged effects of monetary policy 

In addition to the inflation number, there is no getting around the fact that wage pressure remains high and unemployment is at 3.6%, hanging around the lowest mark in half a century. This, again, is great news for the overall economy, but will also spell concern in the Fed that inflationary pressure remains and the fight is not yet over. Cutting into this environment feels like a risk that Powell and co. are not in a position to take, and perhaps won’t be for longer than some anticipate. 

With monetary policy operating with such a notorious lag, and the fact this hiking cycle has been among the swiftest in modern history, it needs to be caveated that, while the Fed is determined to keep all options open, there genuinely is a lot of uncertainty. 

For crypto, this bears consideration amid the tangible excitement that has begun flowing through certain circles. Undoubtedly, this has been a tremendous run and the industry would have snapped your hand off if you offered them this position nine months ago, when FTX circled the drain and threatened to pull a chunk of the entire asset class down with it. But the battle has not quite been won yet, even if the tide has begun to turn. 

The post A temperature check on crypto as market eyes end of rate hiking cycle appeared first on CoinJournal.

Bitcoin inverse relationship with dollar weakening

  • The US dollar is the global reserve currency, meaning it is a key influence on all risk assets
  • Bitcoin has seen its negative correlation with the dollar pick up since the transition to a tight monetary regime, meaning it tends to strengthen when the dollar falls
  • This inverse relationship has softened in recent weeks, as Bitcoin has failed to capitalise on dollar weakness arising from lower inflation in the US
  • If history is to be followed and the correlation returns, Bitcoin could be in a place to advance


The status of the US dollar as the world’s reserve currency means it exhibits an enormous influence on risk assets not only in the US, but across the financial world. 

Bitcoin is no exception. We have seen an inverse relationship between the two assets play out over the last few years, meaning that as the dollar weakens, Bitcoin tends to strengthen, and vice-versa. 

This is for a couple of reasons. Firstly, Bitcoin is commonly quoted in USD due to, as mentioned above, the dollar being the global reserve currency. Therefore, it is simple math that when the denominator weakens (dollar), the ratio goes up, all else equal. 

However, the effects run deeper. Across international trade, debt and non-bank borrowing, the dollar reigns supreme. Firms issuing debt in foreign currency do so via the dollar an estimated 70% of the time (the euro is next with approximately 20%). Again, this is due to its status as the global reserve currency (we see the same in sovereign debt markets). As the dollar weakens, the cost of servicing this debt falls, greasing the wheels of global liquidity. Hence, risk assets tend to appreciate as the dollar falls, albeit a generalisation. 

For Bitcoin, we saw this in effect in 2022, as the dollar surged to a twenty-year high while Bitcoin was ravaged in line with risk assets across the market. Yet in the last month, the correlation has been fading and heading towards zero (i.e. no relationship at all). 

The above chart shows that this has happened a few times before in the last six months, only for the correlation to soon return (i.e. dip back down towards -1). The first major deviation came in March, when the regional bank crisis was triggered amid the sudden collapse of Silicon Valley Bank, sparking mass volatility in the market, with Bitcoin gaining nicely in the aftermath. More recently, the deviation seem to have been caused by the crypto-specific episodes featuring the SEC’s lawsuits against Binance and Coinbase, and the spot ETF applications from a slew of large asset managers. 

In the last week, the dollar has weakened further, continuing its steep downward trend. Its fall of nearly 2.5% is its worst drop since November, when softer-than-expectation inflation readings landed, fuelling speculation that the Federal Reserve would pare back on interest rate rises sooner than previously anticipated. Higher interest rates propel dollar strength, as capital is attracted to the dollar to exploit the higher yield on offer. 

Ten days ago, inflation landed at 3%, again softer than expected and causing a repeat of November’s episode: yet more dollar decline as the market positions itself for a potential end to the rate hiking regime. There is also the case of the dollar strengthening during times of macro uncertainty because, as the reserve currency, it is the safest asset on record. With correlations going to one in a crisis, there tends to be a significant strengthening of the dollar when fear increases. 

This is part of the reason for the dollar’s relentless advance in the first three quarters of last year, while the subsequent easing this year has seen the opposite. The below chart shows this relationship over the last half-century, with periods of recession (grey on the chart) typically resulting in gains for the greenback.  

Looking forward, one can imagine a scenario where the dollar continues to head lower. Inflation in the US is far lower than most other countries; eurozone inflation is at 5.5%, while the UK is at 7.9%, to name a couple. The Fed should have a greater ability to ease off the rate hikes if that divergence is maintained and inflation in the US continues to fall. 

For Bitcoin, should its inverse relationship with the dollar return, this could mean it may in a position to take advantage. It should be noted, however, that crypto-specific risk is high, which can overshadow any dollar effects easily. Not to mention the macro climate remains uncertain, even if things are brightening up. But history tells us that a weakening dollar is a boon for Bitcoin, and the past nine months have been no exception to this rule. 

The post Bitcoin inverse relationship with dollar weakening appeared first on CoinJournal.

Are Bitcoin halvenings priced in? Understanding the price effects of Bitcoin’s supply cut

Key Takeaways

  • Bitcoin has historically performed robustly in the year following a halvening event
  • However the sample size is small, meaning care should be taken in assessing past performance
  • Halvening cycles have also coincided with global liquidity cycles, offering an alternate theory for Bitcoin’s strong post-halvening performances
  • The next halvening is slated for April 2024
  • The question of whether halvenings are priced in is an intriguing one to analyse

Perhaps nothing sums up Bitcoin’s enigmatic, mysterious and unique makeup like the halvening events. As time goes on, these events have become the subject of fierce debate as to how they affect Bitcoin’s price. Will the sudden dip in new supply boost Bitcoin’s price, as it has in the past? Or are these scheduled events, by definition, already priced in?

Before analysing this question, let us quickly explain the halvenings for the uninitiated. These events refer to the phenomenon by which the block reward for Bitcoin is cut in half every four years (or every 210,000 blocks, to be exact). In such a way, the rate at which new Bitcoins are released suddenly drops 50% every four years. Currently, each new block appended to the end of the blockchain results in 6.25 Bitcoin being released, equating to 900 extra Bitcoin in circulation. Upon the next halvening, this will fall to 3.125 Bitcoin per block, and 1.5625 four years after that, and so on. 

The first halvening occurred in 2012, the second in 2016 and the third in 2020. The next halvening should occur in April 2024. These halvenings will continue approximately every four years until the 64th and final halvening will occur in the year 2140, after which miners will live off transaction fees alone, and no more Bitcoin will be released into circulation. 

This halving schedule means that, despite Bitcoin only being 14 years old, over 92% of the final supply of 21 million Bitcoin is already mined. It also creates the seductive hard supply cap so often referenced by Bitcoin enthusiasts: there will only ever be 21 million Bitcoin, and we know the schedule at which they will hit the market. 

This is set and stone and is familiar to most Bitcoin investors. Where it gets interesting and things open up for debate, however, is how these halvening events affect the price. 

Previous halvenings have preceded aggressive rises in the Bitcoin price. Some point towards the simple effect of supply and demand: as the rate of new supply suddenly cuts in half, the price should rise, all else equal. We will deal with this after this chart, which demonstrates how the Bitcoin price has indeed moved in accordance with these four year cycles. 

While the above chart looks seductive, there are three glaring counterpoints to the argument that halvenings will be a positive influence on price going forward (afterwards, we will assess why there could also be an intriguing argument that these cycles will hold).  

  1. Given the 50% supply cut is known in advance, it should be priced in already
  2. Small sample space
  3. Global liquidity cycles line up with halvenings

Simply put, the efficient market hypothesis dictates that these halvening events should not bump up price because they are known in advance. This is a compelling argument and one that is hard to discount. 

One must also remember, when assessing the seemingly formidable relationship between these four-year cycles and Bitcoin to date, that there have only been three halvenings. That is an absolutely tiny sample size and means, quite simply, that we don’t know. Not to mention, Bitcoin’s liquidity was still so low at the first halvening in 2013 (some could even argue that the second halvening was not exactly liquid either) that it is hard to even put much weight in the effect of the few halvenings we have seen. 

The fact we have scarcely a decade of Bitcoin price history with any sort of liquidity to analyse is what makes the asset so befuddling, unique and, ultimately, difficult to model via any sort of legacy valuation framework. 

In addition to the small sample size, there is also the matter of global liquidity cycles, which have coincidentally lined up incredibly well with the halvening cycles. The below chart from Fidelity Digital Assets demonstrates this well by plotting the growth of central bank balance sheets against Bitcoin’s growth while marking the halvening events.

The argument that Halvenings will increase price

While the above arguments surrounding the small sample size and the matching with global liquidity cycles are compelling, especially for anyone looking at this as a non-crypto native reared on the efficient market hypothesis, there is one intriguing theory which points to why halvenings may not be priced in – and one that is very specific to the intricacies of the Bitcoin blockchain. Which, again given its brief history, means it can only be a theory at this point in time. 

Namely, it is derived out of the difficulty adjustment which is programmed into the underlying blockchain; as more miners join the network, the difficulty automatically adjusts so that blocks are validated at the same pace as before (i.e. ten-minute intervals) and hence the supply of new Bitcoins holds steady at the pre-determined pace, regardless of how high the hash rate is on the network. In other words, it becomes more difficult to validate blocks as more miners join the network, meaning a higher cost of energy is required to mine Bitcoin. 

The converse also holds true – if miners leave the network, it becomes easier to mine and hence lower energy/costs are required to mine. This means that, theoretically, the cost of production for Bitcoin should be driven towards its market price. Otherwise, in theory at least, an arbitrage opportunity would open up if a gap emerged between the cost of production and the market price.

Look at it from a miner’s point of view: if the price of Bitcoin jumps above the cost of production, the miner will allocate their energy towards mining the Bitcoin at the lower cost of production, leading to an upward difficulty adjustment until the delta closes. Similarly, if the cost of production was above the market price, the miner would stop mining as it would be cheaper to obtain Bitcoin on the market, and the cost of production would fall, again until it reaches a natural equilibrium. 

Because the market also has the ability to shift its funds into Bitcoin itself or miners (via publicly traded mining companies and other related investment vehicles), it is essentially faced with the same decision as our hypothetical miner regarding where to allocate their capital.

This is an argument against the thought that the market has priced in the halvening, because if it had, then the price of Bitcoin would be far above the cost of production and the above equilibrium would be violated. An example may illustrate this with more clarity:

Let us take the current market price and production cost of one Bitcoin as $30,000. To use an extreme scenario, if the price of Bitcoin then doubles to $60,000, what would you do as a miner? You would sell your Bitcoin at $60,000 in order to finance your energy cost to mine Bitcoin at $30,000. Other miners will do the same, driving both the hash rate (difficulty) of mining up and the spot price in the market down until convergence is found. It doesn’t just have to be miners – speculators will realise that Bitcoin may be overpriced relative to its cost and launch their own sell orders, adding to the momentum until convergence is found. 

While the above example overlooks the fact that the hash rate may lag price because it takes time to set up a mining rig / increase mining capacity as opposed to simply clicking a button on a bitcoin spot order, it sums up the predicament. Ironically, this theory argues that efficient markets ensure that the halvening cannot be priced in, otherwise there would be an arbitrage opportunity. Or course, this is ironic because it means that an event which is guaranteed and publicly known cannot be priced in, which is the very definition of the efficient markets hypothesis. 

All in all, the prior theory may be a bit oversimplified, and it is difficult to overlook the influence of global liquidity cycles. 

At the end of the day, with only three halvenings to date and arguably only one with reasonable liquidity, we are all stabbing in the dark – Bitcoin still carries a lot of mystique from a valuation perspective and it is very challenging to put a formal framework around it. But it shows the power of narratives and how the investors can create them as they please. Either way, we will find out in the near future, as one thing is for certain: we know that halvening is coming, and its ticking closer every ten minutes.

The post Are Bitcoin halvenings priced in? Understanding the price effects of Bitcoin’s supply cut appeared first on CoinJournal.

Bitcoin’s correlation with gold sinks to two-year low, a warning for investors

Key Takeaways

  • Bitcoin’s correlation with gold is at a two-year low
  • Divergence highlights yet again that Bitcoin remains a risk-on asset
  • This may change in the future, but for now, Bitcoin resides on the long-end of the risk spectrum 
  • With full effects of tight monetary policy still to come, market should not get ahead of itself

Bitcoin’s correlation with gold continues to fall, highlighting the oft-repeated goal of achieving a store-of-value status akin to digital gold remains a long way off for now. 

We looked into this last month, when the correlation between gold and Bitcoin fell to the lowest value since the FTX collapse in November, an event which sparked mayhem in the crypto markets while the rest of the financial world traded quite placidly, including gold. 

Since then, the correlation has continued to fall. Indeed, looking at the more volatile 30-day Pearson correlation metric, the relationship is approaching a near-perfect negative one over the past thirty days. The last time it dipped this close to -1 was over two years ago (it nearly hit this level post-FTX also). 

While the prior metric is a little noisy and bounces around a lot due to the rolling 30-day window sample size, the next chart displays the same indicator but over a 60-day rolling window. Outside of the FTX collapse in November, the 60-day correlation is the lowest it has been in eighteen months, when Russia invaded Ukraine in February 2022 and sparked extreme volatility in the financial markets.

What does this tell us? Not much, really, beyond what we already know: Bitcoin trades like a risk-on asset. That much has been clear over the past two years or so, as one of the fastest rate hiking cycles in recent history has pulled the rug out from risk assets. The Nasdaq shed a third of its value last year in what was the worst year for stocks since 2008. Bitcoin was far from immune, falling down to a low of $15,500 in the aftermath of the FTX collapse. 

While the question over whether Bitcoin can decouple from risk assets in the long term remains one of the most intriguing, the numbers make it blindingly obvious that this has not happened to date. The pullback during last year’s bear market also emphatically strikes down any assumption that Bitcoin’s days of violent drawdowns were behind it (we are most definitely not in a “supercycle”), with the fall of over 75% from peak to trough being the fourth-worst in the last decade. 

The recent dip in correlation follows a turbulent period in the crypto markets. The SEC sued both Binance and Coinbase, the two biggest exchanges on the planet, in the first week of June. Last week, Ripple secured a big win when a (partial) ruling on its two-year battle with the SEC seemed to imply it is not a security (although ambiguity does remain and there will likely be an appeals process). 

These developments are obviously specific to the crypto markets, and with crypto not yet having a tangible impact on traditional finance markets, the turbulence did not carry over. 

Additionally, the decoupling of gold and Bitcoin pours cold water on the theory that Bitcoin had already obtained its “hedge” status, which was spoken in some quarters as the asset rose amid the banking wobbles in March. In reality, while this price action was intriguing, it was likely more to do with the market pricing in a lower chance of future interest rate rises, as we discussed here

“In a lot of ways, Bitcoin’s correlation with gold can be viewed as a progress tracker on the path to achieving the holy grail: an uncorrelated store of value for investors”, says Max Coupland, director of CoinJournal. “With this correlation dipping to a two-year low, it is clear there is a long way to go yet. Bitcoin remains highly susceptible to the whims of the stock market and the macro economy, and that is worth bearing in mind for investors amid the recent rise in crypto valuations”. 

Remember, last year represented the first time in Bitcoin’s history that it observed a pullback in the stock market. Prior to that, it was humming along in the longest and most explosive bull markets in history, kicked off almost to the day when Bitcoin was launched (the stock market bottomed in March 2009, two months after the genesis block was mined). 

All in all, Bitcoin is still trading like a risk asset, and it has experienced the pain of that label in the past eighteen months as interest rates have spiked aggressively. While it is up over 80% thus far in 2023, it remains 56% off its peak from November 2021. 

Nonetheless, things are undoubtedly brighter today than they were nine months ago, when FTX collapsed and the world seemed destined for a gruesome recession. While that recession still may come (and indeed the prospect of lagged effects of tightened monetary policy loom large), economic indicators have been remarkably resilient while hopes of a soft landing have risen. 

Personally, I fear the market may be getting ahead of itself, but what do I know? The sheer scale of rising from a zero-rate environment to a climate where T-bills are paying north of 5% is ferocious, and won’t be shrugged off lightly. Indeed, looking at previous cycles throughout history, the stock market has tended to pull back further after hikes have ended. 

While past performance is never indicative of the future, it certainly should provide food for thought, as phrases such as “meme stock”, “altcoin” and “robinhood” creep back into the vernacular. 

But whatever happens, the charts are clear: Bitcoin is still a risk-on asset. That means if the blood does hit the streets, gold will strongly outperform its digital cousin. Maybe that will change one day, but for now, the numbers don’t lie. 

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The post Bitcoin’s correlation with gold sinks to two-year low, a warning for investors appeared first on CoinJournal.

Why is Ethereum outperforming Bitcoin since the Merge?

Key Takeaways

  • Ever since the Merge went live in September, Ether has underperformed Bitcoin significantly 
  • This is despite the supply of Ethereum falling post-Merge
  • More Ether is also being staked since the Shapella upgrade in April 
  • Demand has fallen with regard to Bitcoin, however, overriding the lower supply
  • Regulatory crackdown and greater institutional interest in Bitcoin appears to be driving the divergence, writes our Head of Research

One of the more interesting trends to follow within crypto is that of the ETH / BTC chart. In other words, how the world’s two largest cryptocurrencies move in relation to one another. Now ten months on from the Ethereum Merge, it feels like a good time to re-analyse the relationship.

The Merge completely transformed Ethereum, switching the network to a proof-of-stake mechanism rather than the proof-of-work mechanism it was on previously. On the other hand, Bitcoin remains (and always will be) a proof-of-work blockchain. 

This means that the fundamentals underlying the Ethereum network have flipped. Perhaps this is most noticeable when plotting the total circulating supply of ETH. The Merge going live in September 2022 sticks out like a sore thumb, with the supply (slightly) contracting from that date. 

Zooming in on the post-Merge period in the next chart shows the contraction. The supply has reduced at an average rate of 0.15% per month. Prior to the Merge, the supply grew by 0.41% per month.  

Moreover, the supply of liquid Ether has contracted even further than the above charts show. Looking at the total value of staked Ether, the pattern was relatively steady from when the staking contract opened in November 2020. This trend more or less continued as the Merge went live in September 2022. However, as seen on the next chart, the amount of staked Ether spiked notably in April of this year, as the Shapella upgrade went live. 

This Shapella upgrade, also known as Shanghai, allowed staked Ether to finally be sold, with some of the early stakers having locked up their tokens since Q4 of 2020. Despite concern that this would lead to a vast amount of Ether flooding the market and denting the price, the opposite has happened. With the indefinite lock-up restriction no longer a factor, the Ether staked has spiked noticeably, with the trend far steeper in the three months since. 

But how has this structural break on the supply side affected Ether’s performance against Bitcoin? Less supply equals a higher price, right? Well, no actually. Almost on a dime from when the Merge went live, ETH has fallen relative to Bitcoin, as I have plotted on the below chart (the black line denotes the Merge in September). 

The reason, of course, is that price is governed by supply and demand, rather than just supply. And while supply has contracted, the demand side of the equation has not held up – at least relative to Bitcoin.

Ether underperforms Bitcoin

Two months after the Merge, FTX collapsed, sending the entire crypto sector for a spin. As is customary in times of price decline, Bitcoin fell less than the rest of the market. Thus, Ether falling against Bitcoin in the aftermath of the crash is not surprising. 

However, thus far in 2023, the crypto market has been on fire, with token prices accelerating across the board as the macro climate has softened amid falling inflation. The Nasdaq jumped 32% in the first six months of the year, its best half-year return since 1983. And yet, despite the crypto market riding this wave, Ether fell further still against Bitcoin, something which seemingly bucks the trend. 

The reason is most likely regulation. The great regulatory crackdown in the US has been brutal on crypto, but Bitcoin has not been as squarely in the crosshairs as a lot of the market. This has led to Bitcoin dominance rising to its highest level in two years, now comprising over 50% of the entire cryptocurrency market cap. It opened the year at 42% (it was also roughly at this level at the time of the Ethereum Merge in September). 

This comes amid sentiment that Bitcoin could be carving out its own niche in the space. This is the view that many in the space have long held (and a Bitcoin maximalist’s sworn mantra), but the difference now is that the law appears to be coming around to the same point of view. I’ll let Coinbase CEO Brian Armstong put it more succinctly than I: 

“We go back to 2021, we wanted to become a public company, we described everything about our business, the assets that we list on our platform, how we do staking. The SEC at that point allowed us to become a public company”.

“A totally different tone started to happen (about a year ago),” Armstrong continued. “We kind of got this information from the SEC that, well actually everything other than Bitcoin is a security.”

Although Ether was not present on the list of tokens announced by the SEC that comprised securities, a list which included some other popular cryptos such as MATIC, SOL and ATOM, it has not been immune. Viewed more or less in a grey area, Ether nonetheless has suffered as the regulatory blows kept coming. While last week’s XRP ruling is positive for the space, and there will be many more twists and turns to come, it still feels like Bitcoin has separated itself from the crowd. 

Further reinforcing this view is the slew of Bitcoin ETFs submitted for approval from some of the world’s biggest asset managers, including Blackrock. Denied repeatedly to date, the presence of big names backing Bitcoin amid this suffocating US legal environment is another boon for the orange coin. And while one could (rightly) hypothesise that a Bitcoin ETF would make an Ether ETF more likely, there is no denying that Bitcoin has pulled further ahead in the race. 

This has led to a situation in 2023 where Bitcoin has outperformed Ether, which seems surprising when the latter has tended to outperform the former during prior periods of price expansion. But it is always important to remember how brief the trading history for both Ether and Bitcoin is. Ether was only launched in 2015, and it was another couple of years before it traded with any genuine liquidity. So, leaning on past performance must always be done with a pinch of salt. Additionally, the crypto market has never experienced a macro environment like this. 

Finally, any hopes that the Merge would accelerate Ether into the stratosphere perhaps overlooked how much of the upgrade was priced in. This was in the works for a long time, repeatedly delayed before it finally came and went. 

All in all, this has led to Ether lagging Bitcoin, with the latter increasing its dominance over not only Ether, but the crypto market as a whole. Things are changing quickly in crypto, and Bitcoin has been weathering the turbulent waters better than altcoins in recent months, primarily due to the legal climate. 

Then again, the way prices have been going, Ether investors can’t be too unhappy – despite Ether’s second-place medal, it is still up 57% thus far this year. It could be worse, even if they did back the wrong horse. 

The post Why is Ethereum outperforming Bitcoin since the Merge? appeared first on CoinJournal.

Stay away from Grayscale Bitcoin Trust despite discount narrowing to 10-month low

Key Takeaways

  • The Grayscale Bitcoin Trust (GBTC) has persistently traded at a discount to its net asset value
  • The discount has narrowed to its lowest mark since September off hope the fund is more likely to be converted to an ETF
  • The entire GBTC debacle represents the mess that is the institutional regulatory climate in the US
  • Spot ETFs are a question of when rather than if, and such investment vehicles will then be a thing of the past
  • That won’t assuage frustration of GBTC investors, who have been caught badly as alternative Bitcoin investment vehicles have come online and demand for the trust has dried up

Among the interesting aspects of the fallout from the slew of recent spot Bitcoin ETF filings is how it affects the controversial Grayscale Bitcoin Trust (GBTC). 

The trust has been flying, up 56% in the three weeks since Blackrock’s ETF filing was announced. 

Notably, this means it has significantly outpaced its underlying asset, Bitcoin. That sounds like a good thing, but it really summises the problem with this investment vehicle that has done nothing but frustrate investors in recent years, but we will get to that in a moment. 

I have plotted the movement of the GBTC against Bitcoin itself in the next chart, highlighting the outperformance the Trust has had since the ETF filing, with Bitcoin itself up “only” 21%. 

Grayscale discount to net asset value narrowing but still enormous

The trust’s discount to net asset value has also narrowed to its smallest mark since September, now below 30%. This comes as investors bet the trust is now more likely to finally be allowed to convert to an ETF.

 Should this conversion occur, the discount would narrow to near zero, as funds would then be allowed to flow in and out of the vehicle without affecting the underlying assets. For the time being, while it remains a trust, there is no way to get Bitcoin out of GBTC. This, coupled with steep fees (2% annually) means that a heavy discount has persisted. 

In truth, the very existence of the Grayscale trust is a black mark on the sector. The discount it trades at is farcical – even following the recent narrowing, a 30% delta is an enormous chasm, one that is hurting investors. 

The outsized assets under management – essentially trapped due to the closed-fund nature – feels like a throwback to the days when anyone and everyone wanted to get exposure to Bitcoin through whatever means necessary. Grayscale was the only shop in town, and such was the demand for Bitcoin, coupled with that monopolistic power, that it even traded at a premium for much of its early history.

However, as more mediums through which Bitcoin exposure can be had have come online, the premium has flipped to a discount, and that discount has become large. It is probably fair to say that investors displayed a lack of due diligence for how the fund works, another throwback to the up-only bull market of days gone by. 

Without donning a captain hindsight outfit, there was always going to be competitor firms coming online and the premium was bound to come under pressure. An investment in GBTC essentially amounted to two things: a bet on Bitcoin, and a bet that the trust would be converted into an ETF quickly. 

But at that, perhaps sympathy can be shown to investors. Investment management firm Osprey Funds has a similar product, and earlier this year sued Grayscale, alleging that its competitor misled investors about how likely it was that GBTC would be converted into an ETF. This, they allege, is how they captured such a share of the market. 

“Only because of its false and misleading advertising and promotion has Grayscale been able to maintain to date approximately 99.5% market share in a two-participant market despite charging more than four times the asset management fee that Osprey charges for its services”, the suit alleges. 

Whether Grayscale knew of the regulatory difficulty it would face or not, it has tried and failed for years to convert the vehicle into an ETF. Last year, it sued the SEC itself, declaring the latest rejection “arbitrary”.

Institutional climate turning

My thoughts on the trust overall remain the same. I believe it represents a terrible investment (obviously), and its mere existence is only a byproduct of the regulatory travails that the sector has struggled with. There is no reason to even consider buying this unless there is quite literally no other vehicle through which to gain Bitcoin exposure. 

There will come a day when all this squabbling over trusts and ETFs will likely be nothing but a throwback of a more uncertain time. But time is a luxury that many investors don’t have, and Grayscale has been a horrendous investment, typical in a lot of ways of the travails the space has had in bridging the gap to become a respected mainstream financial asset. 

Not only is the discount jarring as it is, but it widened beyond 50% in the aftermath of the FTX collapse as it emerged that crypto broker Genesis was in deep trouble. Genesis’ parent company is Digital Currency Group (DCG), the same parent company of Grayscale. Genesis eventually filed for bankruptcy in January. 

This sparked concern around the safety of Grayscale’s reserves, something which they company did not exactly comfort investors about when it refused to provide on-chain proof of reserves, citing “security concerns”.  

While the furore over reserves has quietened down, the episode is yet another stark reminder of the oft-repeated (but perhaps not often enough) phrase: “not your keys, not your coins”. 

The problem for institutions to date is that they have had trouble accessing Bitcoin directly for a variety of reasons, primarily regulatory-related. While spot ETFs will also technically violate the “not your keys” mantra, with prudent regulatory oversight and a strong custodian, this should be a safe way for institutions to gain exposure to Bitcoin. 

That would end all this nonsense (and that really is the right word) such as trusts trading at 30% discounts, and give investors a secure avenue through which to put their views on Bitcoin into conviction. That may still be a long way off, but if demand for these products remains, it’s only a matter of time.

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Crypto prices rising and sentiment flipping but liquidity & macro picture are ominous

Key Takeaways

  • Crypto prices are rising sharply, with Bitcoin up 20% in the last three weeks
  • The filing of a number of high-profile Bitcoin ETFs has pushed optimism in the market
  • Under the hood, liquidity remains low and some worrisome trends emerge, however
  • The regulatory woes are still present, with Coinbase and Binance facing a murky future
  • The macro picture also remains uncertain, with the prospect of a lagged impact via tightening monetary policy looming large

It wouldn’t be like crypto markets to get overly excited. In the past couple of weeks, positivity has returned to the space, led by the seminal filings for a Bitcoin spot ETF by two of the world’s biggest asset managers, Blackrock and Fidelity. 

Additionally, Fidelity were among a cohort of large trad-fi operators, including Schwab and Citadel, to back the new exchange EDX, which offers trading for Bitcoin, Ether, Litecoin and Bitcoin Cash. 

Bitcoin is up 20% in the last three weeks, breaching past the $30,000 mark, while Ether is up 16% in the same timeframe, approaching the $2,000 mark once more. A glance at the Fear and Greed index, an interesting metric which gauges overall sentiment in the space, shows it is markedly in the “greed” sector with a score of 61 (0 represents extreme fear, 100 represents extreme greed). 

And yet, a look under the hood betrays some concern. Firstly, if the filing of the ETFs is the reason for the recent ramp, as it appears to be, is a 20% jump justified? The SEC has declared the recent filings as “inadequate”, according to the WSJ, informing the Nasdaq and CBOE (who filed the paperwork on behalf of the asset managers) that there is not enough detail with respect to “surveillance-sharing agreements”. The SEC had previously said that sponsors of a Bitcoin trust are required to enter into a surveillance-sharing agreement with a regulated market of significant size.

While the applications can be updated and refiled (and the CBOE did indeed refile theirs since, with Nasdaq likely soon to follow) the development hints at how difficult it has been to get the much-coveted spot ETF over the line. There is no guarantee that these are approved, despite the big names involved – the SEC even rejected an application from Fidelity in the past, turning it away in January 2022. 

In truth, it feels inevitable that Bitcoin spot ETFs will one day be traded freely, but a 20% jump on a mere filing in the last couple of weeks is a massive ramp when considering what else has happened in the space, and the state of markets, which we will delve into now. 


Liquidity continues to lag, a factor which cannot be overstated – and indeed one which the eventual approval of spot ETFs should help.

Looking at centralised exchanges per data from Kaiko as we close out the second quarter of 2023, volume over the past three months was lower again, coming in at the lowest number since 2020, before Bitcoin and crypto embarked on their inexorable price rises and took the financial world by storm. 

But with lower liquidity, moves to both the upside and downside are exacerbated. This has perhaps contributed to Bitcoin’s steep rise in the past few weeks, and also year-to-date, with it currently up 83%. 

But liquidity and volumes being so low should be alarming for market participants. Much of the inroads made during the pandemic, with regard to Bitcoin taking its place next to bona-fide asset classes from a trading perspective, have slowed if not reversed – at least from a liquidity perspective. 

As further evidence of this, in the below chart, I’ve presented the total balance of stablecoins across exchanges, which has fallen a staggering 60% in the past six months – an outflow of $26 billion. 

Having said that, there are pockets of optimism which hint at a brighter future if/when these spot ETFs do get approved. Looking at volume in derivatives markets, it has been rather consistent. In fact, it is markedly up on the second half of 2022. Perhaps this means the spot market has been greater affected by the regulatory crackdown. Either way, it’s a less gruesome picture than what we are seeing in spot markets. 


Right now, with regard to crypto-specific risk, it really all comes back to regulation. We have discussed the ETF filings, but June also brought two seminal moments: formal charges brought against Coinbase and Binance. 

The two cases are extremely different, mind you. Binance’s lawsuit could not be less surprising, with the exchange constantly skirting guidelines and laws. The charges amount to a laundry list of different offences, including trading against customers, manipulating trade volume, encouraging users to circumvent geographical restrictions and securities violations. 

It is the latter charge which is the centre of the suit against Coinbase, however, and the most pivotal of the lot. It is also why the Coinbase suit is far more intriguing. Do not forget that the allegations are coming from the SEC, the same body which presided over Coinbase’s IPO in April 2021. Why did the SEC let an unregistered securities exchange float on a US stock exchange? You tell me. 

But let’s get back to the point: what this all means for crypto markets. While Bitcoin appears to be carving its own place out in the eyes of the law, a slew of other tokens were named as securities by the SEC. Despite this, they have risen sharply since off the Bitcoin ETF news. Does this make sense? 


At the end of the day, crypto is going to crypto. Prices move, and trying to pinpoint reasons is often a fool’s errand. The last month, however, feels like we have seen an extremely aggressive price rise despite some bad news on the regulatory front. 

Additionally, the macro picture has not changed much, even with the pause at the last Fed meeting. Fed chair Jerome Powell’s comments made it clear that this was a pause rather than an about-turn in policy. 

“Looking ahead, nearly all committee participants view it as likely that some further rate increases will be appropriate this year,” Powell said when announcing the pause. 

The market believes him. I backed out probabilities from Fed futures in the next chart, which show that there is currently an 86% chance of a 25 bps hike at the next Fed meeting in three weeks time, with only a 14% chance of rates being left unchanged again. I have presented this next to the same probabilities conveyed by the market exactly a month ago (Bitcoin is up 20% in the time since), showing softer forecasts do not explain the sharp price (the chance of no hike has actually come down). 

As I said, crypto going to crypto. But with assets as notoriously volatile as what we see in this sector, it would be wise to stop and think about whether the sudden wave of positivity is justified. When considering the liquidity picture and the regulatory trouble, there are plenty of reasons to hesitate. 

Then when one layers in the macro picture, the picture becomes murkier again. Let us not forget that we are in the midst of one of the swiftest rate hiking cycles in modern history, with rates rising all the way from zero to above 5%, and the prospect of them rising even further later this month. 

Monetary policy operates with a lag, and the scale of that tightening is enormous. Sentiment may feel like it has flipped dramatically, but there is a long road ahead yet. 

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Bitcoin dominance surging amid changing market dynamics and regulatory crackdown

Key Takeaways

  • Bitcoin dominance measures the ratio of the Bitcoin market cap to the cumulative cryptocurrency sector market cap
  • It is currently at 58%, the highest mark since April 2021
  • Market dynamics are changing as institutions consider Bitcoin, while rest of crypto market still struggles amid tight monetary policy environment
  • Regulatory clampdown has also declared many tokens as securities, while Bitcoin appears to be carving out its own niche 

The Bitcoin market is never boring. 

Having said that, the year 2023 has (thus far at least) has not thrown up mayhem on the scale of what we saw in past years. In 2022, Bitcoin freefell as the world transitioned to tight monetary policy, while scandals such as the Terra collapse and the staggering deception at FTX coming to light. This came after the pandemic years of 2020 and 2021, when crypto surged into mainstream consciousness, Bitcoin printing dizzying gains and inspiring dinner table conversation around the globe as to what this mysterious Internet money was all about. 

So, 2023 cannot match the scale of that drama. But there is something very intriguing happening to the market dynamics of Bitcoin, at least relative to other cryptocurrencies. Bitcoin dominance, which measures the ratio of the Bitcoin market cap to the cumulative market cap of all cryptocurrencies, is at its highest level in over two years, at 52%. In other words, 52% of the cryptocurrency market cap, currently at $1.18 trillion, is Bitcoin. 

Dominance fell in the years 2020 and 2021

The above chart shows that Bitcoin opened the year 2020 with a dominance of about 70%. Over the course of the next 365 days, it bounced around a bit and trickled down to the high 50s. However, it was the final quarter of 2020 when Bitcoin began to make serious moves, rising from $10,000 to $28,000. In this time period, the dominance ratio rose from 59% back to 70%, where it closed at, approximately the same dominance ratio it opened the year at twelve months earlier.  

The following year, 2021, saw altcoins catch up. Bitcoin’s dominance plunged like a stone, falling quicker than it ever had before. The wider cryptocurrency market exploded as stimulus cheques, lockdown-driven Robinhood trading and basement-level interest rates pushed capital into anything and everything remotely connected to a blockchain. 

The total cryptocurrency market cap touched $3 trillion in November 2021, while Bitcoin’s market cap peaked at $1.28 trillion. Bitcoin dominance, therefore, was down to 43%. However, the worst inflation crisis since the 1970s forced central banks into one of the fastest rate hiking cycles in recent memory, following years of zero (or even negative in some cases) rates. 

For risk assets, this spelled trouble. And make no mistake, the entire crypto market is as far out on the risk spectrum as it gets. Capital flooded out of the space as rates continued rising, inflation got hotter, and several nefarious scandals struck the crypto sector (looking at you, Do Kwon, Sam Bankman-Fried and Alex Mashinsky).  

Which brings us to now. While inflation peaked in Q4 last year, the macro climate is still uncertain. Employment is tight, the economy is still hot and inflation, while dropping, is well north of the Federal Reserve’s 2% target. In Europe, inflation is even hotter (and don’t even ask about the UK, if that still counts as Europe anyway). 

In crypto, however, something is changing. Bitcoin’s dominance has risen and appears to be in an uptrend again. It is currently up to 58%, the highest mark since April 2021. On the one hand, this is typical of what we have seen in the past: money begins to flow into Bitcoin after a prolonged and seismic pullback (2022), seeing dominance rise before it eventually filters into altcoins and the rest of the market catches up. 

However, there are two points to counter why this time could be different, and may give pause for thought to those assuming that altcoins will follow this time around. The first is, well, obvious: past cycles aren’t indicative of future ones, and this is especially true for Bitcoin. 

The asset was only launched in 2009, and it is only in the last five years that it has traded with any sort of reasonable liquidity (although even at that, it’s thin). It would be foolish to put too much weight into previous years, therefore, especially as its entire existence has, until last year, coincided with a remarkable bull market in the wider economy. This is Bitcoin, and crypto’s, first rodeo in a high-interest rate environment, so all bets are off. 

But aside from that blindingly obvious caveat, there is more evidence to suggest that there may have been a structural shift with regard to the market in the last six months, or something that may change the dominance trend going forward. What I am referring to is regulation and, more recently, institutional moves. 

The regulatory clampdown in the US has been brutal for the crypto sector, with a number of tokens being confirmed as securities by the SEC in recent times, including Solana, Polygon, Cosmos, BNB and Cardano. Bitcoin, on the other hand, appears to be carving out its own niche. Or, as Coinbase CEO Brian Armstrong said when discussing the lawsuit levelled against his exchange by the SEC, “we kind of got this information from the SEC that, well actually, everything other than Bitcoin is a security”. 

Therefore, it feels foolish to declare this rise in dominance over the past few months as temporary. If anything, it is surprising that it has not risen more, although a lot of this regulatory trouble may have been priced in already, while the biggest non-Bitcoin token, Ether, seems to have evaded the dreaded security label thus far. 

However, there is also the reality of what has been happening on the institutional side in recent weeks. Blackrock and Fidelity, two of the world’s largest asset managers, have both filed for spot ETFs. These are Bitcoin ETFs, not crypto ETFs. 

In a sector where regulation is so hazy and the intimidation factor of actually buying physical Bitcoin is so high (the reality is that wallets and seed phrases are not ideal for new users or institutional funds, no matter how seductive the promise of self-custody is), this could do wonders for liquidity – one of the big factors holding Bitcoin back right now. It may also assuage concern around the lack of transparency and reliability of centralised exchanges, as institutions can simply bypass actors like Binance and go straight towards a (regulated) Bitcoin ETF. Of course, these ETFs are not approved yet, but we are a hell of a lot closer to a Bitcoin ETF than any other sort of crypto ETF. 

The macro climate is still uncertain: inflation may have peaked but is still elevated, and with monetary policy notoriously operating with a lag, the full pain of a Fed rate north of 5% has yet to be felt. There are numerous challenges still to come. The regulatory crackdown could worsen, while who knows what is going behind the scenes at some of these crypto companies. But it feels undeniable that as bad as things are for crypto, Bitcoin has its head and shoulders above the rest of the gang. 

With all this in mind, the rising dominance makes sense. And while I have no idea what happens next (at the end of the day, crypto is going to crypto), I certainly see nothing that would make me confident that Bitcoin dominance, which is now at a two-year high, is bound to inevitably retreat soon. 

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