Bitcoin and Ethereum weekly trading volume hits 10-month low

Neither the author, Tim Fries, nor this website, The Tokenist, provides financial advice. Please review our website policy before making any financial decisions.

The most recent Kaiko Research Report shows an unsurprising bearish trend for crypto investors. Among several bearish indicators, the weekly trading volume on exchanges for Ethereum and Bitcoin has returned to a level 10 months ago, in June 2021.

Similarly, Bitcoin is down 39.67% from its record price in November, while Ethereum is down 36.62% from the same month.

Bitcoin remains highly correlated to stocks

At the beginning of April, weekly BTC/ETH volumes decreased by 30% compared to the end of March. Image credit: Kaiko.com

Bitcoin is still the biggest body in the crypto ecosystem, often pulling up or down other altcoins, with some notable exceptions like Monero (XMR). In the same way, just as altcoins seem to depend on Bitcoin, Bitcoin also depends on the stock market. This correlation started to cement itself in 2020 as more and more institutional investors flocked to the crypto market.

Image credit: Bloomberg

This period also coincided with near-zero interest rates, providing institutional investors with cheap credit. The Federal Reserve had already created an addictive relationship with the stock market since the global financial crisis of 2007-2009. This reliance manifested itself in 2018 when the Fed announced interest rate hikes to rein in its cheap money policies, leading to a crisis of market sabotage.

However, years of cheap money via quantitative easing (QE) have intensified significantly since mid-2020, eventually triggering spiraling inflation that is now at a 40-year high of 8.5%. Needless to say, this is very unpopular as consumer prices are making life less comfortable, prompting the Fed to accelerate its next wave of interest rate hikes.

As a result, institutional investors who have ventured into crypto are reducing the risk in their portfolios. Inevitably, this creates selling pressure on the dominant cryptocurrency, aligning Bitcoin with risky tech and growth stocks. It is possible that there will be a break from the high correlation between BTC stocks and stocks if the long-term Bitcoiners hold the line.

In the meantime, many investors are betting on a slowdown.

Derivatives investors are also bearish

The Kaiko report further notes an intensified put-call ratio that has not been seen for months. The higher it is, the greater the number of bearish bets (puts) compared to bullish bets (calls). Options volume on Deribit, the world’s largest BTC/ETH options exchange, pits put-to-call ratio against 20-day realized volatility.

Image credit: Kaiko.com

As BTC/ETH prices fell last week, investors placed more bearish bets (puts). Interestingly, Ethereum puts are higher than Bitcoin, despite reduced volatility. Similarly, perpetual futures are showing the same downtrend.

Image credit: Kaiko.com

With no set expiry date, perpetual futures contracts are closer to the spot price of the underlying asset. This is because their funding rate mechanism prevents the price of perpetuals from deviating from the spot price. If the funding rate, as a percentage, is in the high positive range, this indicates overleveraged long positions. Conversely, if the funding rate is in the high negative range, this indicates over-leverage of short positions, foreshadowing a potential short squeeze.

For example, if a funding rate of 0.02% on Bitcoin perpetual futures is long with a stake of $10,000, the account would be deducted $2. For a short position, the account would earn $2, which happens every 8 hours when the funding rate countdown hits zero. Therefore, if the funding rates are positive, it means that long traders are funding short traders.

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Dollar strengthens amid devaluation

You would think that the dollar would weaken against Bitcoin, given the high rate of inflation. However, the Russian-Ukrainian conflict has dropped an important key in the economic engine of the EU, which is 40% dependent on Russian energy products.

The US Dollar Index (DXY) is a measure against a basket of foreign currencies, with the Euro carrying a 57.6% weighting. As Russia strengthens its ruble with gold, as the world’s second-largest gold producer exploiting 9.5% of this safe-haven asset annually, it is also doing so with its massive oil and gas exports. On the other hand, the EU must look for ways to redirect its entire energy infrastructurewhich probably won’t happen until 2027.

Consequently, the Russian-Ukrainian conflict has boosted the DXY, having gained 4.7% since the beginning of the year (YTD). The Fed’s hawkish U-turn further helped the DXY rise. In turn, due to its high correlation with stocks, Bitcoin is inversely correlated with the USD.

Image credit: Kaiko.com

This leaves both Bitcoin and Ethereum with negative YTD returns, at -13.35% and -17.94% respectively. By comparison, it looks like Russia is well prepared for the conflict, with the ruble outperforming BTC/ETH at -7.65% year-to-date.

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About the Author

Tim Fries is the co-founder of The Tokenist. He has a B.Sc. in Mechanical Engineering from the University of Michigan and an MBA from the University of Chicago Booth School of Business. Tim was a senior partner on the investment team in the US Private Equity division of RW Baird and is also a co-founder of Protective Technologies Capital, an investment firm specializing in detection, protection and control solutions.

Garland K. Long