Opening bell │ #16 │ 3rd June
Report highlights:
Blockchains
Rollup TVL trends: optimism down, Arbitrum up, newcomers thrive.
The total value on L2 chains using the rollup tech stack has more than doubled this year, rising from $4bn to over $10bn. However, not all are progressing at the same rate. For instance, Optimism has seen its TVL drop by 7% since the start of this year, while Arbitrum has gained 32%. Meanwhile, Base and Blast have experienced significant growth, with their TVL soaring from millions to billions. Notably, another 23 rollup chains have increased their TVL by 182% this year, collectively now rivaling Arbitrum, the leader of rollups since 2022.
DeFi lending?
Rollup liquidity fragmented as early blockchains promise higher yields.
The majority of DeFi lending protocols are forks of Aave or Compound, resulting in similar supply and demand dynamics for setting rates. This year, less than $2 billion USDC has entered the Ethereum DeFi ecosystem. As new Rollup chains try to gain traction, they initially promise higher yields due to limited supply. Investors move funds across various chains, competing initially with higher yields, but eventually, this leads to fragmented pools for the same use-case.
% Yields on USDC?
Day trading strategy historical performance?
Bitcoin, Ether outperforms in ‘buy the close’ - XRP excels in ‘buy the open’ strategy.
In hindsight, we probably should have called this newsletter the “Closing Bell” because when markets open in the US, crypto often experiences significant fluctuations, resulting in notable losses about half the time during trading hours.
A popular strategy among traders is to buy at the close of stock market trading hours and sell when the stock markets reopen the next day. This strategy is based on the theory known as the “Night Effect,” which suggests that financial instruments perform better in the dark, avoiding the volatility seen during market hours.
Over the past year, markets have reacted unpredictably to every inflation report, Fed speech, and unemployment headline. Crypto is not immune to this.
Historical data shows that this strategy is effective, with returns significantly higher than a buy-and-hold strategy.
Back-testing this strategy since Bitcoin ETFs started trading shows that returns would be just under 55%. In contrast, a buy-and-hold strategy yielded 41% for Bitcoin since ETFs started trading.
Our back test did not account for slippage or trading fees and looked at the open and close of the New York Stock Exchange.
For Ethereum, the results are even more promising. Over the same period, a buy-and-hold strategy would return 43%, while buying at the US market close and selling at the open would yield a substantial 78%.
In Ether terms, this would have resulted in the trader securing an extra 23% of the cryptocurrency.
The other option is to buy at the open and sell at the close. This strategy, as far as the data shows, is not ideal for Bitcoin and Ether. Day traders who used this tactic, which we’re not very sure many did, would see a negative return of approximately 8% for Bitcoin and a massive -19% for Ethereum.
Returns since 11-Jan-2024 when Bitcoin ETFs began trading? |? US market hours
As far as winning trades are concerned, markets haven’t made this a clear shot by any means.
Napoleon said it best: “victory belongs to the most persevering.”
The number of winning trades using this strategy is slightly over 50%. Not terrible, but the strategy requires persistence and a willingness to take overnight risk.
Despite buying at the open and selling at the close having similar win rates, the returns are in the red over the course of this trading year.
Ultimately, the question is whether a strategy can outperform market returns in the long run. Historically, this strategy has proven to do so, especially for Ether.
But if you really want to see the silver lining, it’s likely better to read this “Opening Bell” than buying it.
Except for one coin that seems to be going against this trend – XRP.
Back-testing shows that buying at the open and selling at the close for XRP would have returned investors 60%.
The cryptocurrency is trading 17% below what it was since Bitcoin ETFs began trading.
This highlights the potential of this cryptocurrency as a rotational asset during market hours.
% of trades that are profitable
Bitcoin returns based on strategy
Bitcoin ETF AUM & flows?
Road to $100k: Bitcoin price range returns to equilibrium relative to ETF holdings.
In our last Opening Bell, Copper suggested that Bitcoin ETFs may have reduced its volatility, with net inflows from US investors being a key indicator of demand and price dynamics. There is no new narrative on the horizon.
Despite the April sell-off, Bitcoin has traded sideways for the majority of the time, aligning with the trend of total ETF holdings (see chart 1).
BTC/USD vs ETF holdings
Moreover, Bitcoin appears to be closely tracking its price range relative to the amount of Bitcoin held by ETFs (see chart 2).
BTC/USD price range vs total BTC ETF holdings in 10k increments (x-axis)
After net flows were in the red in April, May has brought the markets back to their average price relative to holdings, driven by over $2 billion in net flows (see chart 3).
领英推荐
ETF monthly flows?? |?? $mn?
ETF monthly net purchases?? |?? BTC
However, this is still far less than the inflows seen in February and March this year.
Our back-of-the-envelope calculations show that Bitcoin appreciates by 2% for every 10,000 BTC added to the coffers of ETF issuers.
Should this trend continue, it implies that investors would need to buy an additional 200,000 Bitcoins—totaling $17 billion in inflows based on its appreciating price—to reach the coveted $100,000 mark.
This would put the total ETF holdings at 1.05 million BTC, just over 5% of the total circulating supply today.
To realize how big that number really is, it would imply that BTC ETFs would be larger than the total AuM of all the gold ETFs currently trading on the market. Although this might sound like a tall order, it is within the realm of possibility.
Average monthly inflows this year were $2.7 billion. On-chain metrics suggest that Bitcoin is only at the midway point of its historical 24-month bull run (See OB#14). Then again, the narrative is not on-chain.
Bitcoin volume?
Volume and volatility distribution: US, Asia in counter-balancing act.
Bitcoin volumes year-to-date have surpassed $6.4 trillion on crypto perpetual futures markets, marking a 50% increase compared to the same period last year (see Chart 1). Exchanges are performing well.
Bitcoin monthly perpetual volume? |? $tn
Despite the introduction of ETFs to the market, the distribution of trading volume remains unchanged. While there might have been an expectation for higher share of trading volumes during US market hours, the data does not support this.
Since 2023, the US has dominated monthly trading volume during stock market trading hours, averaging 70% (see Chart 2). Despite this significant volume distribution disparity, Bitcoin hits its highs and lows almost evenly across both time zones (see charts below).
Bitcoin volume distribution? |? %
Specifically, Bitcoin reaches its highs and lows 55% of the time during US market hours, with Asia accounting for the remainder.
However, markets experience more downward pressure during US trading hours. This was evident in April when ETFs offloaded fewer than 8,000 BTC, with US markets accounting for a substantial 73% of the lows made during the month.
Bitcoin % of highs made
Bitcoin % of lows made
Derivatives
Futures premiums surge at fastest rate, funding rates turn bullish in May.
After bottoming out at the end of April, premiums on forward-dated futures on Deribit have surged from 4% to a massive 17%, marking one of the fastest increases in expectations that Bitcoin will continue to rise.
Funding rates have also followed, returning to levels above what traders were paying at the start of the year. This year, the longest streak of positive funding rates since 2019 has been observed, with long traders paying short traders for their open positions on perpetual futures for over 30 days. The sentiment is undoubtedly bullish, as Bitcoin closed the month of May 25% higher.
Derebit forward-dated futures annualized premiums? |? %
Derebit funding rates? |? days %
Derebit Bitcoin funding rates
Derivatives
Ethereum open interest surge, Bitcoin holds steady.
With the approval of an ETH spot ETF, open interest on crypto exchanges for perpetual futures has surged remarkably for the smart-contract blockchain. In BTC terms, open interest has only grown by 3% since the start of the year. In comparison, ETH has seen contract exposure rise to 3.26 million ETH, marking a 39% increase since the start of the year.
Despite Bitcoin being the larger market, the gap is closing quickly. Bitcoin’s open interest stands at just over $16 billion, while Ethereum is catching up rapidly with contracts amounting to just over $12 billion.
Change in open interest since start of year? |? in ETH or BTC (i.E. Not USD OI)
Economic calendar
Key events this week: US manufacturing, unemployment, EU parliament elections.
Disclaimer.
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