Institutional Top of Mind #14

Keep up with the top industry updates as we present bi-weekly market insights that are valuable to traders in the institutional space.

In this week's edition, Kelvin Lam, CFA, Head of Institutional Research for OKX, delved into one of the recent trending topics in the financial market: Bitcoin reached a new all-time high. He analyzes the major distinctions between the all-time highs observed in 2020 and 2024, aiming to analyze the implications these differences hold for the future trajectory of Bitcoin and market dynamics.

TL;DR

• Bitcoin recently reached new all-time highs, and we have identified some distinct differences compared to the last all-time high in 2020. These differences revolve around market trading activities, the Bitcoin halving cycle, and the macroeconomic backdrop.
• During the recent all-time high in Bitcoin, notable differences were observed in trading volume, funding rates, and alternative data such as Google Trends. Additionally, this time Bitcoin reached its all-time high before the Bitcoin halving event instead of after.
• The macro picture reveals a stark contrast between the current 10-year treasury yield of 4% and the 0.9% level during the 2020 all-time high. Additionally, it's looking likely that the future interest rate path diverges from that of the previous all-time high.

Bitcoin made all-time highs

As the market took a moment to celebrate Bitcoin once again reached another all-time high, crossed $69k and rose to a record high for the third time in five days. One may question what makes this particular surge stand out from the previous all-time high 39 months ago on November 30, 2020, when Bitcoin reached $19,857?

To gain a better understanding, we compare it from three major angles: market interest and trading activities, Bitcoin halving cycle, and the macroeconomic backdrop. By exploring these aspects, we aim to extract valuable insights into how this current bull cycle may differ from the previous one and what the trajectory might look like.

One notable distinction of this cycle is the prominent institutional adoption of Bitcoin and the growing recognition of governments worldwide that consider it as an asset or even a reserve currency. This institutional embrace adds a new dimension to the market landscape and has the potential to shape the future performance of Bitcoin in unprecedented ways.

1. Market interest and trading activities

a. Trading volume

When comparing the trading volume during Bitcoin's previous all-time high with the current one, there are some useful observations. The average daily spot trading volume (7 days leading to the all-time high) measured in USD has increased, primarily driven by the higher price of Bitcoin ($19k vs $69k). However, there's been a significant drop of 54% in the trading volume when measured in terms of Bitcoin units. This contrast in trading volume carries significant implications for Bitcoin as an asset with limited supply and its role as a store of value. It suggests that trading activity during the current all-time high might not be as vibrant as it was during the previous peak, indicating a potential shift towards holding Bitcoin and increased confidence in its long-term potential. Additionally, it could reflect a more mature market with a greater presence of institutional traders who tend to hold their positions for extended periods.

Source: Coingecko , Mar 13 2024

b. Funding rate

The recent all-time high has sparked market observations and discussions surrounding elevated funding rates. In early March 2024, the funding rate surged over 100% as traders increasingly utilized leverage to take long positions, capitalizing on the bullish momentum. While a reset in the funding rate would be beneficial for the market, ensuring a more sustainable rally, it's worth noting that the recent all-time high has recorded a lower funding rate compared to the previous peak in November 2020. This suggests that the current all-time high is characterized by a lower level of optimism compared to the previous one.

c. Public interest

By utilizing alternative data sources such as Google Trends, there are some interesting pattern on the extent of public interest in Bitcoin over time. In 2020, there was a noticeable and significant surge in public interest leading up to the week (orange line) when Bitcoin reached its all-time high. In contrast to 2020, the level of public interest in Bitcoin has been consistently higher in the weeks preceding this year's all-time high. This suggests a more focused approach to researching and studying cryptocurrency, resulting in a reduced prevalence of the "fear of missing out" (FOMO) mentality within the market. This heightened interest can also be attributed to the launch of spot ETFs in January, which captured public attention and prompted individuals in the traditional finance sector to delve into researching Bitcoin prior to the official product launch, consequently bringing Bitcoin onto the radar of traditional financial participants.

2. Bitcoin halving cycle

With the Bitcoin halving approaching in just a month , it's being considered a significant catalyst that will potentially drive up the price of Bitcoin in this cycle. Notably, from a price action standpoint, Bitcoin reached its all-time high much earlier this time around compared to the previous cycle (37 days before the halving versus 203 days after the halving in 2020). This can be attributed, at least in part, to the heightened focus among traders on studying the halving narrative and attempting to capitalize on this event, which will reduce the daily issuance of new Bitcoin supply by half. Similar to how commodities are traded, the dynamics of supply have a direct impact on the price of Bitcoin, particularly since it is widely recognized as a store of value by institutions .

Source: OKX , OKLink

From a miner economics perspective, the Bitcoin rally leading up to the halving event has provided miners with an opportunity to realize profits from the mined Bitcoin and strategically plan for the future. This pre-halving rally allows miners to assess and project how the new miner economics will unfold after the halving takes place. By capitalizing on the price surge, miners can strategically position themselves and make more informed decisions regarding their operations, profitability, and long-term sustainability in the face of reduced block rewards. The rally acts as a crucial phase for miners to optimize their strategies and adapt to the forthcoming changes in the Bitcoin mining landscape. Back in 2020, we observed volatility in Bitcoin hash rate as some mining operations decided to shut their machines due to unsustainable economics, adding uncertainty to supply dynamics and network stability to Bitcoin. This time around, we are expecting to see reduced volatility of the hashrate as the Bitcoin mining industry consolidated due to the halving.

3. Macro backdrops

This stark contrast stands out as the most significant and impactful deviation from the previous all-time high. With Bitcoin gaining recognition as an asset class in the traditional financial space, the macroeconomic dynamics are expected to exert a greater influence on its price movement. As the Chicago Mercantile Exchange (CME) holds the largest open interest in Bitcoin Futures*, with Bitcoin spot ETFs boasting daily trading volumes surpassing $5 billion**, more traders and participants are increasingly basing their decisions on the broader macroeconomic landscape, mirroring the approach typically adopted when trading other financial asset classes.

The US 10-year bond yield is commonly used as a proxy for the risk-free rate and has significant implications for financial assets. In particular, there's often an inverse correlation between the yield and risk assets, such as equities, as the risk-free rate represents the opportunity cost of investing in these riskier assets***. Interestingly, Bitcoin has defied historical trends and experienced a robust rally, even amid a tightening macroeconomic backdrop characterized by the rise in the US 10-year bond yield (as shown in the table below). This stands in contrast to the situation observed in 2020, when the Federal Reserve had to aggressively cut rates and implement quantitative easing measures in response to the Covid pandemic.

Source: Investing.com

Based on the latest data from FedWatch , fed funds futures prices indicate a 75%+ probability of at least one rate cut by the end of July 2024. However, it's important to note that this probability is subject to fluctuations, and market consensus can shift, particularly if we receive more hawkish statements from Fed Chairman Powell during this week's FOMC meeting. Regardless of when the rate cut(s) will happen, there's a higher likelihood of the economy heading towards a quantitative easing environment rather than a tightening one in the current stage of the economic cycle. In fact, we have already seen some notable developments in other major economies. In late Feb 2024, China surprised the market with a largest ever reduction in the five-year loan prime rate. This suggested that the macroeconomic environment is more favorable compared to the previous time when Bitcoin reached an all-time high in 2020.

??*Source: Coinglass , Mar 18 2024

??**Source: The Block , Mar 18 2024

??***Source: Investopedia , Mar 18 2024

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