The cryptocurrency market had another volatile week that saw the price of Ether (ETH) drop below $3,000, and Bitcoin (BTC) hit a new multi-month low of $37,700. Stock markets also suffered a sharp sell-off primarily due to investors’ fear of possible changes in the size of the next Fed rate increase.
So far, Bitcoin is down 41.72% from an all-time high of $69,000, and while the price may be in what some describe as a bear market, a deeper dive into various on-chain data and derivatives shows lower inflows and a pivot for institutional investors. They are the main factors that affect the price movement of Bitcoin.
Perpetual futures contracts dominate trade volumes
A lot has changed in the cryptocurrency market since 2017 when the bitcoin market was dominated by spot trading and derivatives markets made up a small portion of the trading volume.
According to a recent report by cross-chain market intelligence firm Glassnode, Bitcoin derivatives “now the dominant place for price discovery” with “future volume now being multiples of spot market volume.”
This has important implications for Bitcoin’s current price action because future trade volume has been declining since January 2021. The metric has fallen by more than 59% from $80 billion per day during the first half of 2021 to its current volume of $30.7. billion a day.
During the same time period, perpetual futures contracts overtook traditional futures as the preferred instrument of trading because they closely match the spot index price and the costs associated with delivering bitcoin are much lower than traditional commodities.
According to Glassnode, “current open interest in perpetual swaps is equivalent to 1.3% of bitcoin’s market capitalization, which is approaching historically high levels.”
Despite this, the overall transfer of capital and leverage from expiring futures contracts resulted in a lower leverage ratio, “indicating that a reasonable amount of capital is already leaving the bitcoin market.”
The reason for this turnover is likely related to the fact that yields available in the futures markets currently exceed 3.0%, which is only 0.1% higher than the 2.9% yield available on 10-year US Treasuries and well below the 8.5% average CPI. The American CPI (CPI) is a magnified reading.
“It is possible that lower trade volume and lower total open interest is a symptom of capital outflow from bitcoin derivatives, toward higher yields, and potentially lower perceived risk appetite.”
Related: Trader Points to BTC Price Levels to Watch as Bitcoin Still Risks $30K ‘Ultimate Bottom’
The data on the chain indicates the adoption of a large entity
Moving away from the derivatives markets, positive signals for the future of Bitcoin can be found by digging deeper into the on-chain volume data.
As of October 2020, the percentage of transactions over $10 million has increased from 10% of the conversion volume on a good day to the current daily dominance average of 40%.
According to Glassnode, this indicates significant growth “in value settlement by institutional-sized investment/business entities, trustees and high net worth individuals.”
Using the total transaction volumes combined with the Network Value to Transaction (NVT) ratio, the current value of Bitcoin ranges between $32,500 and $36,100.
According to Glassnode, both the 28-day and 90-day NVT models “begin to fall and may reverse” with the 28-day break above 90, which has historically been a “medium to long-term constructive signal.”
The total cryptocurrency market capitalization is now at $1.791 trillion and the Bitcoin dominance rate is 41.5%.
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