Bitcoin's Correlation with Stocks is Increasing
12.01.2022 • Просмотров:

Cryptocurrency Market Review

By Decimal

Do you remember Leonid Gaidai’s immortal masterpiece “The Diamond Hand”, where Gesha Kozodoev was rushing about shouting: “Chief, everything is gone, everything is gone!”. That’s about how many newcomers, or people with weak nerves in the crypto market look today, watching the falls of the BTC. As it turned out, many institutional investors had stronger nerves than some crypto traders.

According to Coinmarketrate.com, BTC currently has a market capitalization of $800,918,452,012, with a daily volume of $26,909,555,517. 18,926,056 BTC have already been mined.

The price of BTC / USD for 7 days. Source: Coinmarketrate.com

The price of BTC / USD for 7 days. Source: Coinmarketrate.com

What we are seeing in the Bitcoin market today is a normal correction. In just one year, Bitcoin has increased by 61%. Do you think this is an endless story?

Let’s look at what is happening with such aspects of the MTC as trending sectors, liquidity, volatility, spreads to make sure that everything is going as it should go.

Bitcoin's Correlation with Stocks is Increasing

Bitcoin’s Correlation with Stocks is Increasing

After the publication of the minutes of the December Fed meeting, the monetary policy outlook was officially classified as “tougher than expected” (hawkish), which led to a sharp sell-off in the cryptocurrency and equity markets. At the end of the week, Bitcoin fell by 17%, and its correlation with the S&P 500 stock index reached its highest level since July 2020, while hundreds of millions of long positions were liquidated on derivatives exchanges, which exacerbated the price drop. Market sentiment now remains clearly bearish.

In addition, a nationwide Internet blackout in Kazakhstan caused a drop in hash power in the Bitcoin network.

  • Layer 1 Tokens Suffer After Strong Fourth Quarter

Most of the first-level tokens fell sharply last week, giving way to Ethereum and the general cryptocurrency market. The drop occurs despite the fact that over the past year alternative networks have gained a share of the Ethereum market (according to the Total Value Locked indicator), and the planned scaling of the network is still several months away.

Avalanche’s AVAX has seen its sharpest drop since opening in 2022 – by 22%, well below the 16% drop in Ethereum. The native Terra token, the second largest blockchain for decentralized finance, also decreased by 20%. In recent months, Terra’s LUNA has received strong growth dynamics, helped by the upgrade of Columbus 5 and the launch of several projects, such as DEX Astroport. The FTM of the Fantom project showed itself in the best way, which closed on Sunday at about the same place where it was trading at the beginning of the year.

  • DEX Trading Volume grows in December, Uniswap V3 Dominates

Trading volumes on leading Ethereum-based DEX have been steadily growing since July, reaching $57 billion in December, which is the highest since May. The growth is almost entirely due to the high trading activity on Uniswap V3, which now accounts for 77% of the total volume. Trading activity on Curve, DEX, optimized for stable coin exchanges, increased from 3 billion to 4 billion in a month. $, while the trading volume on Sushiswap and Uniswap V2 decreased.

Although Curve owns the largest share of DeFi Total Value Locked (TVL) on Ethereum – 14%, which is more than twice the TVL of Uniswap, trading volume remains relatively low compared to other DEX. This is due to Curve’s unique model of issuing rewards for liquidity, which led to a sharp increase in TVL. This has led to the emergence of a phenomenon in which pools struggle for liquidity and which is known as “war curves”. This liquidity battle spans many protocols and is complex, but has implications for understanding DeFi incentive models, so you should explore this topic to learn more.

  • Open interest falls while funding rates remain neutral

From January 5-7, open interest in Bitcoin futures fell by 38%, to $7 billion, as spot prices fell from $46,000 to $41,000, which led to debt reduction and forced liquidation on derivatives exchanges. The drop in open interest last week was stronger than the Omicron sell-off in early December, when it fell by 33% in two days.

The Binance and Bybit retail-oriented exchanges saw the sharpest drop, which suggests that traders used a lot of leverage. The volume of derivatives trading showed volatility in accordance with fluctuations in the price of BTC: on January 5-6, they increased by 74% to $ 59 billion, then fell to $ 29 billion. $ 7 on January, and then rose again to $ 51 billion.

Despite the sharp drop in open interest, the refinancing rates of perpetual Bitcoin futures showed little volatility. This contrasted sharply with the sell-off in early December, when funding rates on all exchanges briefly turned negative.

  • Financing rates for perpetual Bitcoin futures

Funding rates represent the cost of holding a long position and are considered an indicator of market sentiment and leverage. When financing rates are positive, long position traders dominate and pay money to short position traders. Negative financing rates indicate a general decline in sentiment, with short traders dominating.

The fact that financing rates did not fall as much as at the beginning of December suggests that leverage was not as extreme, and the balance between long and short positions was more stable.

  • The volumes of options differ from the volumes of futures

Bitcoin options trading volumes have increased dramatically since the summer of this year, in contrast to futures and perpetual futures trading volumes, which have declined. The chart above shows the volumes of BTC futures on the leading derivatives exchanges, as well as the volumes of options on Deribit, which now accounts for more than 90% of the entire options market.

It is noted that futures volumes have declined sharply over the past month. Average weekly volumes more than halved in the period from November to December. The volume of perpetual futures, which account for more than 80% of the total volume of Bitcoin derivatives, also declined, albeit at a slower pace. However, the volume of BTC options remained significantly higher than during the summer bear market, while the volume of calls (bullish bets) accounted for 60% of the total number of transactions concluded in December.

  • Bitcoin has the highest correlation with Stocks since July 2020

The December meeting of the Federal Reserve System had a strong impact on global financial markets, as traders reacted quickly to the prospect of tightening monetary policy. During the volatility, Bitcoin behaved like a risky asset, and its correlation with the Nasdaq and S&P 500 stock indexes jumped to the highest levels in more than a year – .61 and .58, respectively. On the other hand, the correlation of BTC with gold has remained negative since September.

Despite the sell-off of risky assets, US government bond yields reached multi-month highs last week. Below is a chart of the yields of 2-year, 10-year and 30-year US government bonds, which are considered a safe haven.

Yields, which move inversely with bond prices, have been rising throughout December, despite concerns about the potential impact of the Omicron COVID variant on economic growth. This trend is associated with high inflation, due to which the real (inflation-adjusted) bond yields remain negative. In general, it is expected that the tightening of financial conditions will negatively affect risky assets such as stocks and cryptocurrencies, as they will become less attractive compared to safe bonds.

  • Volatility reduces the annual profitability of cryptocurrencies

Despite the market downturn, the annual profitability of cryptocurrencies was high: BTC grew by 64%, and ETH – by 404%. US stocks have also enjoyed a stellar year with strong earnings figures despite rising inflation. While cryptocurrencies provided the highest returns in absolute terms, stocks outperformed them when adjusted for risk. Above you can see the annual total return and the Sharpe ratio (risk-adjusted return) for fixed assets. Given the volatility, the S&P 500 and ETH performed the best, while gold and bonds performed the worst.

Volatility is expected to persist throughout 2022, as the cancellation of monetary incentives during the pandemic will disrupt the markets, especially risky assets. Below is the Fed’s balance sheet along with the implied volatility of the S&P 500 as measured by the VIX index to give an idea of how monetary policy has affected equity markets.

  • Fed Assets versus Stock Volatility

It is worth noting that the volatility and balance of the Fed moved in opposite directions, with the VIX significantly decreased after the stock market crash in March 2020 (and the shortest recession in history), and the balance of the Fed more than doubled and exceeded $8.3 trillion.

In recent months, Bitcoin has strongly correlated with the stock market sell-off, and we can expect global financial trends to increasingly influence sentiment in the cryptocurrency market.