The cryptocurrency market has seen another volatile week with the price of Ether (ETH) dipping below $3,000 and the price of Bitcoin (BTC) hitting a new multi-month low of $37,700. Equity markets also fell sharply, mainly due to investors’ fear of possible changes in the size of the Federal Reserve’s next interest rate hike.
To date, the price of Bitcoin is down 41.72% from its all-time high of $69,000 and while the price could be in what some describe as a bear market, a deeper look at various on-chain and market data Derivatives shows that a drop in new capital inflows and the pivot of institutional investors are the main factors affecting BTC price action.
Perpetual futures dominate trading volumes
Many things have changed in the cryptocurrency market since 2017, when the Bitcoin market was dominated by spot trading and derivatives markets accounted for only a tiny fraction of trading volume.
According to a recent report by on-chain intelligence firm Glassnode, Bitcoin derivatives “now represent the dominant venue for price discovery” with “futures trading volume currently representing multiples of spot market volume.”
This has major implications for BTC’s current price action because futures trading volume has been declining since January 2021. The metric is down more than 59%, from a high of $80 billion a day during the first half of 2021 to its current volume of $30.7 billion per day.
Over that same time period, perpetual futures have overtaken traditional fixed-date futures as the preferred instrument to trade, as they are more closely matched to the price of the spot index and the costs associated with receiving BTC are considerably less than those of traditional raw materials.
According to Glassnode, “Current open interest in perpetual swaps equates to 1.3% of Bitcoin’s market cap, which is approaching historically high levels.”
Despite this, the full transfer of capital and leverage out of fixed maturity futures has led to a declining leverage ratio, which “suggests that a reasonable amount of capital is actually exiting the Bitcoin market.”
The cause of this capital turnover is likely related to the fact that the yields available in the futures markets are currently just above 3.0%, which is only 0.1% higher than the 2.9% yield available on the bond. 10-year US Treasury bond and well below the US Consumer Price Index (CPI) inflation print of 8.5%.
The Glassnode team said:
“Declining trading volumes and lower aggregate open interest are likely to be a symptom of capital flowing out of Bitcoin derivatives, and into higher yielding, and potentially lower perceived risk, opportunities.”
On-chain data points to the adoption of large entities
Derivatives markets aside, positive signs for the future of Bitcoin can be found by digging deeper into on-chain volume data.
As of October 2020, the percentage of transactions over $10 million has gone from 10% of transfer volume on a good day to the current dominance of 40% on average per day.
According to Glassnode, this points to significant growth “in securities settlement by institutional-sized investment/trading entities, custodians, and high-net-worth individuals.”
Using aggregate transaction volumes along with the network value to transactions (NVT) ratio, the current value of Bitcoin is between $32,500 and $36,100.
According to Glassnode, both the 28-day and 90-day NVT models are “beginning to bottom out and potentially reverse” with the 28-day breaking above the 90-day, which historically “has been a constructive medium-to-low signal.” long term”.
The total cryptocurrency market capitalization currently stands at $1.791 trillion and the dominance ratio of Bitcoin is 41.5%.
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