12 Sep 2022

Bitcoin regaining market share as Ethereum merge nears

Bitcoin has seen a strong recovery of 8% over the last seven days, outperforming the rest of the crypto market and regaining some of its market dominance as we approach the long-awaited Ethereum merge.
Market update (18).svg
This will be a huge week in crypto. The Ethereum merge is scheduled to occur on September 15th, and market participants are hedging like never before. Relative to BTC, ETH has underperformed in the last week, falling from a peak of 0.085 ETHBTC to 0.077 today, while the ETHBTC correlation has declined in a relatively volatile environment.In addition, we’ve seen subtle hints of BTC decoupling from broad financial markets, most recently with BTC’s strong push Friday morning while financial indexes mostly traded in a flat environment.
Source: Tradingview (Coinbase, Binance US)
Nonetheless, certain events and scenarios generate a high correlation. Today’s U.S. YoY CPI print of 8.3% is one such example. The market expected a MoM print of -0.1%, but we got yet another negative inflation shock, with a slightly positive MoM print of 0.1%. Bitcoin immediately plunged by 5.5% in the following minute from $22,700 to $21,400, while Nasdaq futures dropped by 3.2% as market participants brace for yet another substantial rate hike on the September 21st FOMC. Currently the market is pricing in a 75bps hike with 16% odds of a 100bps hike.
Traders are rotating into bitcoin ahead of the merge
September started with bitcoin significantly underperforming the rest of the crypto market. Bitcoin’s weak performance ended last Friday as the price began soaring. As we approach mid-September, bitcoin is the second-best performer among our indexes, with a 12% gain. The best performer is the Mid Cap index, which saw a solid start to the month.
Source: Bletchley Indexes, Tradingview (Coinbase)
Bitcoin’s outperformance has led the bitcoin dominance to soar by 1.8% over the past seven days. It’s currently sitting above 40% for the first time in almost one month.In late August and early September, the rest of the crypto market, particularly ETH, managed to steal market share from the underperforming BTC. The ETH dominance fell by 0.7% over the past seven days but is still close to its highest level since December 2021.
Source: CoinMarketCapt
Big happenings like the merge sometimes lead to a “sell-the-news” event caused by traders over-positioning themselves ahead of the event. ETH’s underperformance ahead of the merge indicates that some traders attempt to front run a potential “sell-the-news” event. Still, whether or not the merge will turn out to be a “sell-the-news” event remains to be seen.
The market sentiment is improving, but traders are still cautious
The Fear and Greed Index has managed to climb out from the ‘extreme fear’ area. A significant component of the index calculation is market momentum and volume, and recently we have seen growing spot volumes in a positive market. The index still signals ‘fear’, reminding us that investors still don’t believe the seemingly never-ending bear market to be over.
The bitcoin spot volume surges to yearly highs
The 7-day average bitcoin spot volume has surged to a yearly high of $11.4 billion. Most of this trading activity happened on Binance, which has completely taken over the bitcoin spot market due to its fee removal this summer. Binance’s zero-trading fee policy has made new high-frequency trading strategies profitable and attracted these types of traders to Binance’s bitcoin pairs. The 7-day average spot volume on Binance is currently 87% of bitcoin’s total spot volume.
Source: Skew, Tradingview (Binance, Binance US, Bitfinex)
Bitcoin’s third highest daily return in 2022 leads volatility to grow
Over the past weeks, bitcoin’s volatility has been unusually low as the price stabilized around $20k. This calm period ended last Wednesday as the price dropped to a bottom of $18.6k and suddenly made a massive rebound up to $22.3k over just a few days. Most of these gains came last Friday when the price soared by 10.6%. The high volatility will likely continue over the following days as the merge may significantly increase trading activity.
Source: Tradingview (Coinbase)
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