Institutional top of mind | #15

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, Institutional Research for OKX, analyzes the recent market drivers and seeks to understand the drivers behind the recent crypto market weakness. Despite the prevailing uncertainties, alternative trading approaches present opportunities to generate yield in this environment.

TL;DR

• Bitcoin's recent range-bound performance after reaching an all-time high in March 2024 can be attributed to three key market drivers unfolding in the background.

• These three drivers introduce uncertainties to the short-term outlook of Bitcoin and the cryptocurrency market. As a result, there are certain signposts to monitor before reestablishing a more optimistic stance on Bitcoin.

• Amid periods of uncertainty, the dynamic cryptocurrency market presents a range of alternative trading opportunities, including basis trading.

The recent performance of Bitcoin

Bitcoin has rallied strongly since the beginning of the year, reaching an all-time high of $73,787 in mid-March. However, it has encountered technical resistance and failed to break out higher. As of the time of writing, Bitcoin is consolidating within a trading range of $60,000 to $72,500.* This sideways price action has dampened bullish sentiment, with the crypto fear and greed index dropping from 90 on March 7th to 57 currently. Despite the recent pullback, Bitcoin has outperformed traditional assets like the Nasdaq and gold on a year-to-date basis (see chart below). Interestingly, while Bitcoin and the Nasdaq appear to have topped out in March, gold has recently reached new highs this year. This divergence in performance raises questions about the underlying factors influencing these asset classes over the past few weeks and their potential implications for institutional investors navigating the crypto markets.

*Source: OKX, Apr 20 2024

Source: TradingView, Apr 19 2023

Three key drivers in focus

Macro uncertainty

A confluence of factors has defined the macro landscape over the past weeks, contributing to heightened uncertainty and volatility across markets. Firstly, the Federal Reserve has adopted a more restrictive stance on monetary policy in recent weeks, with traders currently pricing in a 68% chance of only one or two rate cuts this year. The resilient labor market and higher-than-expected inflation have driven this sharp shift from the previous consensus of three to four rate cuts in 2024. The divergence in forecasts across analysts has added uncertainty to the interest rate path by year-end.

Moreover, the recent escalation of tensions in the Middle East has further complicated the macroeconomic picture. The direct impact has been a risk-off sentiment, as traders brace for potential disruptions to economic growth and various sectors. More importantly, Middle East tensions have pushed oil prices higher, potentially exacerbating inflationary pressures beyond anticipated levels.

These confluent factors – interest rate uncertainty, persistent inflation concerns, and heightened geopolitical risks – have introduced multiple layers of uncertainty to the macroeconomic landscape. Consequently, the market has witnessed typical risk-off activity over the past few weeks, with the US Dollar and Gold strengthening, while risk assets like cryptocurrencies and stocks have experienced a sell-off.

ETFs and institutional adoption

The launch of spot Bitcoin ETFs and the subsequent significant inflows were initially interpreted as a key driving force behind Bitcoin's price rally in the first quarter. However, as more ETF data unfolds, the high expectations and the institutional adoption narrative may need to be tempered. The initial inflows appear largely driven by retail investors, with BlackRock's IBIT ETF reporting an average trade size of around $13,000. According to the latest 13F SEC filings, while there are indeed some institutional positions in spot Bitcoin ETFs, the allocations remain relatively small. This aligns with our previous assertions that due diligence takes time, and institutional adoption is likely to unfold at a more measured pace, falling short of overly optimistic projections in the near term.

On the other hand, the prospects for Ethereum ETFs approval is uncertain in the near term, as Wall Street analysts predicted a low chance of approval in May. While it is encouraging to see some asset managers in Hong Kong announced the approval of both spot Bitcoin and Ether ETFs by Hong Kong's Securities and Futures Commission (SFC), the size of the ETF market in Hong Kong isn't comparable to that of the US.

Bitcoin halving

The long-awaited 4th Bitcoin halving event finally materialized on April 20 2024. This successful halving demonstrated the technological resilience of Bitcoin and undoubtedly reinforced the narrative that Bitcoin is here to stay. However, as this event was largely priced in since last year, the completion of the halving could temporarily trigger a "sell-the-news" event as traders take profits. In the short term, heightened volatility in Bitcoin's price may ensue as market participants (miners, whales, traders, market makers) adapt to the new regime, where the daily new supply of Bitcoin has been cut in half.

While previous halving events witnessed miners sending more Bitcoin to exchanges, potentially creating selling pressure, the dynamics might be different this time. Bitcoin miners are relatively better positioned for this halving due to the recent rally in Bitcoin's price. As a result, there is less immediate pressure on miners' operations to sell Bitcoin for financing purposes. Interestingly, record-high levels in Bitcoin network fees over the past year could help offset the impact of reduced mining rewards. One exciting development is the launch of the Rune protocol, which is scheduled to coincide with Bitcoin's halving event.

Alternative trading opportunities

As we navigate through the uncertain currents of the crypto markets, alternative strategies can help generate returns while carefully managing undesired market risk. One such approach is basis trading, a strategy long favored by institutional crypto traders due to its potential for arbitrage opportunities and effective hedging of exposures.

We have recently partnered with our institutional clients to share their insights on basis trading opportunities in this dynamic crypto trading landscape. Moreover, the emergence of advanced trading platforms like OKX's Nitro Spreads has led to improved capital efficiency, reduced execution friction, and an elevated user experience. These advancements have opened up new possibilities for traders to maximize their potential returns, especially during times of market uncertainty.

If you are interested in exploring the world of basis trading in the crypto markets, you can now access this exclusive report to gain valuable market insights from our institutional partners.

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