Market measures show that investors are increasingly cautious in their positioning, indicative of their forward views about bitcoin.
Large seller overhangs are largely behind us, and long-awaited rate cuts a foregone conclusion, but seasonality, recessionary worries, and concerns about a continuation of bitcoin cycle are on the forefront of investors’ minds.
Industry-specific catalysts are sparse in the near-term, but the outcome of the US presidential election might prove to be the next big event to emerge.
A Mark to Market on Bitcoin
With the summer over and with most investors back at their desks, we thought it would be valuable to give an accounting of the state of bitcoin markets.
Seasonality
August was not a good month for bitcoin returns, but then again, it usually isn’t. Bitcoin fell 9.8% in August 2024. It’s mean return for the month of August is 0.1%, while the median return for the month (since 2011) before 2024 was -8.5%. We’ve written about the summer season affect for bitcoin numerous times in the past. It seems like this year was no different. Bitcoin has produced positive returns in August only 38.5% of the time before this year.
Unfortunately, September returns are no better, implying we may be stuck in a seasonal slog for the next month. On average, bitcoin has fallen 5.9% in September and the median return is -6.0%. That’s not much solace given that September is just starting.
That being said, September leads into you guessed it, October, which not only has some of the best monthly returns but kicks off the seasonally strong Q4. Bitcoin won’t “magically go up” just because of the changing of the calendar, but investors should be on the lookout for catalysts as we enter the seasonally strong period for bitcoin returns.
The Summer of Overhangs
The flurry of demand incited by the launch of ETFs in Q1 and into Q2 led to the reverse dynamic over the past few months, with the emergence of large sellers. Bankruptcy resolutions and the selling of forfeited bitcoins held resulting from law enforcement actions were the two big categories of large sellers that emerged the past few months. Mt Gox, Silk Road coins held by the US government, German authorities (BKA), and Genesis were just some of the names of entities that either distributed or sold bitcoins over the past few months.
The good thing, however, is that with the exception of the US government’s holdings (~203K BTC or $12.1B), all of these large sellers are out of the market. The US government’s actions are nearly impossible to predict at this point (it doesn’t disclose disposal plans regularly and even when it does, it doesn’t stick to them), so investors will have to deal with the perpetual overhang. That being said, bitcoin has appreciated significantly over the years that the US government has been in possession of these coins and while their coming to market sporadically will undoubtedly cause some short-term consternation, it should not be an obstacle to long-term price appreciation.
ETFs Flip to Outflows
Flows into the spot bitcoin ETFs have still been positive during Q3, +$2.5B, but uneven and at times negative. For example, the past 7 trading days have shown consistent outflows totaling $1.0B, likely weighing on price. These outflows, however, do not come in a vacuum as equity markets have also sold off during that time.
Macroeconomic Factors
All of this news comes as investors prepare for the FOMC’s first rate cut since March 2020, when the Covid-19 health care and economic crisis caused the FOMC to reduce the Fed Funds target rate to 0.0% - 0.25%. While an interest rate cut has been all but assured given declining inflation numbers, market are pricing in 100% for 25 bps cut on September 18th, and about 30% for a 50 bps cut.
Offsetting that, however, has been jitters about a slowing US economy and the prospects of a recession. While August was a good month for stock indices, it was not without some extremely volatile trading. At one point, the VIX Index, a measure of market volatility, jumped to over 65, a level it had reached only twice before, during Covid-19 and during the Global Financial Crisis in 2008. The “Sahm rule” was triggered with the July jobs report (released on August 2nd), a recessionary leading indicator that seems to be on everyone’s lips these days despite it being invented in 2019 (hey, we just found out about its existence at the Fed’s last press conference). Not since MMT (Modern Monetary Theory) have we seen an economic concept grasp the public’s attention so quickly. We’ll see if this one lasts or is quickly disproven as in the case of MMT. The go to recessionary indicator, the yield curve (10y – 3m) has been inverted for nearly 2 years now, calling into question the reliability (timeliness) of such measures. One thing is for certain, the US will eventually have a recession. Predicting when that will happen remains an open question.
Cycles
With bitcoin’s rangebound trading that is increasingly turning to heavy trading, pundits have increasingly called into question the longevity of this price cycle, or if there is even a continuation of the 4-year cycles at all. While only time will answer both of those questions, we think charting bitcoin current cycle (trough to potential peak) against previous cycles might give us a sense of where we are. As can be seen on the following chart, despite the recent price action, the current cycle is essentially where we were as of the two previous cycles. There was a great “pull forward” because of the launch and demand created by the spot bitcoin ETFs this cycle, with nothing analogous in previous cycles. Given that, it’s not surprising to see that at this point we’re at the same place as other cycles. The one big difference is that by this time in other cycles, other narratives began to emerge outside of bitcoin, and that really hasn’t happened this cycle. Without new narratives emerging, the final speculative phase of crypto cycles just may never occur. If bitcoin fails to achieve a new high this cycle outside of the March high, which was just barely over the previous cycle high, we may have to revisit the cycle thesis.
Trader Positioning
With that review of recent events, understanding trader positioning is an important element of where bitcoin goes next. Market-based measures show that traders are increasingly cautious about their forward views regarding bitcoin.
Funding Rates
Funding rates on perpetual swaps have come in substantially and at times have flipped negative. This indicates decreased demand for leveraged long trades and sometimes the desire for traders to be net short (when funding rates are negative). Compared to where this metric was near the all-time highs, it should come as no surprise that the implication is that traders are increasingly cautious.
Futures Basis
The basis on dated futures, both offshore and onshore, has come in as well as bitcoin’s price has languished. This measure of the premium of futures over spot is another measure of trader positioning as futures are another way to get leverage on bitcoin. With this measure coming in, it tells us that investors are less interested in long directional exposure to bitcoin prices.
Put/Call Ratio
The put/call ratio on Deribit, the ratio of open put contracts to call contracts, jumped at the beginning of September, showing an increased preference for hedging downside price action. However, this ratio fell throughout August and is still well off the March highs. We consider current levels well within the historical range, but the recent jump is indicative of incremental caution expressed by traders we think.
Catalysts
Unfortunately, potential upcoming near-term catalysts for bitcoin are sparse at the moment. Most catalysts have to do with macroeconomic data (inflation, unemployment, GDP growth) or monetary decisions (FOMC interest rate decisions) and very few are crypto or bitcoin specific. Certainly, the US presidential election looms large in November, with Donald Trump continuing to make his mark as the crypto friendly candidate. Kamala Harris’s position on bitcoin or crypto broadly isn’t widely known or expressly outlined, but her candidacy is publicly viewed as less favorable toward crypto than Trump’s. We won’t guess as to which candidate might win the election, but November might be a pivotal moment for the industry. Until that time, however, bitcoin might be at the whims of the broader market backdrop.
Market Update
Investors came back from summer break and hit the sell button on risk assets, sending bitcoin down 5.4% on the week. Equities also tumbled, with the S&P 500 down 1.6% and Nasdaq Composite down 2.2%. Economically sensitive oil was down 8.9% on the week. Our read is that worries about a looming recession appear to be overweighing the prospects of a long-awaited interest rate cuts as bonds rallied amidst the drop in risk assets.
Much of our market analysis was covered in previous sections, but just one final interesting observation. Altcoins (with the exception of ETH) seem to be resting near lows/support levels touched previously in the year. Perhaps this is indicative that some of the speculative excesses of the market have been wrung out. Alts aren’t likely to hold if bitcoin can’t, but perhaps if some of the fears abate, traders might be caught offsides.
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