Tech

Bitcoin’s risk-reward calculation is being adjusted by rising rates


One funny thing happened to Bitcoin when interest started to rise: trading volume fell.

One funny thing happened to Bitcoin when interest started to rise: trading volume fell. Now, market watchers are grappling with the implications and world of less loose monetary policy for digital assets.

Bitcoin’s total 30-day moving average volume across Coinbase, Bitfinex, Kraken, and Bitstamp is at its lowest level since August 2021, according to data compiled by Strahinja Savic at FRNT Financial. In the last month, total daily volume across those locations averaged just over $1 billion. That number hit $2.57 billion in May 2021, a drop of nearly 60%.

That comes as the Federal Reserve and other central banks accelerate the fight against inflation, which has remained hotter for longer than many expected. With rates rising and the cost of money no longer hovering around zero, cryptocurrency prices have skyrocketed, prompting investors to recalculate their desire to invest in the cutting edge.

First, the liquidity drawdown will affect crypto volume — and elsewhere — by reducing the amount available for investment, said Noelle Acheson, head of market insights at Genesis Global Trading. private. Second, higher rates increase the opportunity cost of investing in non-yielding assets like Bitcoin. And those who buy coins using leverage may find it harder: higher borrowing costs alter the risk-reward scenario of such transactions, which means that the potential returns of you go down as your costs go up.

“Volume is down because of uncertainty,” she said. “Investors seem to be worried that things could get worse before they get better.”

Acheson noted that the percentage of Bitcoins that haven’t moved in over a year is at an all-time high, with around 76% of coins held in addresses considered illiquid, meaning they have little movement.

While that may lend credence to the idea that Bitcoin can be used as a store of wealth in an environment of “increasing macroeconomic instability and instability,” currently, “variables Price movements are determined by the risk preferences of macro investors concerned about global exchange rates and the economic outlook. ”

Data from Glassnode shows that interest in Bitcoin remains muted – on-chain measures show little growth in the coin’s user base and minimal amount of new demand. Plus, Bitcoin has been stuck in a tight trading range as it is largely dominated by HODLers, a term that refers to greedy investors during high volatility.

“It’s hard to find many observations that suggest the network’s user base is recovering or growing strongly,” said strategists at the research firm. They cite the number of active entities, which is similar to daily active users – that metric is stuck in the same bear market channel it has been mired in for six years.

David Shafrir, CEO of SDM, an institutional OTC desk, said he is seeing new customers arrive but average volume from pre-existing clients has dropped from 8% to 15% . Declining consumption is one of the factors behind that, as is the uncertainty surrounding the Fed’s response to persistently high inflation.

That “caused some significant insecurity in the overall market,” Shafrir said by phone. “Now we’re starting to see the effects of that.”

As is the case with other asset classes, Bitcoin needs new backers for the price to stabilize. The emergence of new crypto fans – institutional as well as retail – over the past two years has coincided with a spike in prices. Bitcoin is up more than 300% in 2020 and another 60% in 2021. The desire to get into the asset class may have changed – so far this year it has lost more than 10% amid a slump The same goes for other risk assets, with analysts saying it will need an entirely new catalyst to push prices higher once again.

“We don’t get a follow-up from new investors. Steve Sosnick, chief strategist at Interactive Brokers LLC, said that despite the relentless hype, most of those inclined to buy Bitcoin have already done so. Ultimately, Bitcoin is a risky asset and will work the way other risk assets do, he said.

One commonly cited measure is Bitcoin’s correlation with other areas of the traditional market that can suffer in a bullish rate environment. The coin’s 90-day correlation and a basket of unprofitable tech stocks now stand above 0.60, the highest on record. (A factor of 1 means the contents are moving in a lock step, while minus-1 will show they are moving in opposite directions.)

Meanwhile, Bank of America’s Alkesh Shah and Andrew Moss in an April 12 note said that Bitcoin exchange inflows last week totaled $1.2 billion and were the largest inflows of the year. The week before, investors withdrew $532 million. Overall, foreign exchange outflows in recent weeks have been several times larger than the average inflows seen during the weeks in early February and early March. Strategists say that the trends “indicate that investors are HODLing.”

However, Russell Starr, CEO and Executive Chairman of DeFi Technologies, says that Bitcoin is more of a hedge against inflation than a risk asset. Inflation could be even worse than current results reflect, he said, citing a measure of restraint common in the crypto community. The US could fall into a recession, he said, and that would prompt the Fed to ease monetary policy again.

“Yes, you could see some weakness in the short term,” he said by phone. But eventually, Bitcoin, under this scenario, will “test $60,000, $70,000, $80,000, $100,000.”





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