03 Oct 2022

Crypto market holding up strongly amid macro turmoil

Bitcoin outperformed the stock market in a September marked by macro turmoil. Is the digital gold narrative back?
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During the previous seven days, the crypto market has seen slight gains, with BTC up 3%, in a week influenced by GBP volatility, Credit Suisse liquidity concerns, and Nord Stream drama in Europe.In this backdrop of macro turmoil, the crypto market has held up strongly, as BTC has outperformed the stock market lately. Within the crypto market, BNB keeps outperforming and is up 5% over the past seven days. ETH (1%) underperforms relative to the two other biggest cryptocurrencies for the fourth consecutive week.
Source: Tradingview (Coinbase, Binance US)
Source: CoinMetrics
Correlations are also showing signs of loosening. Both within the crypto market and between bitcoin and U.S. equities. Bitcoin’s 90-day correlation to Ethereum has fallen to its lowest level since December 2021. Alongside the declining ETH correlation, BTC’s correlation to the S&P 500 has declined to levels not seen since August.Bitcoin’s correlation to gold, on the other hand, is growing and currently sits at its highest level since November 2020. This is an interesting observation, as it suggests that investors have predominantly focused on securing dollar exposure as recession fear ravages the broad financial markets.
Bitcoin outperformed the stock market in September
The Mid Cap Index is September’s winner after keeping all its value throughout the month, followed by bitcoin (-2%) and the Small Cap Index (-3%). The Large Cap Index is the worst-performing after falling by 6% due to its second-biggest component, ETH, plunging after the merge.September was a weak month in the broad financial markets, with S&P 500 falling by 8% and Nasdaq by 9%. Amid this macro turmoil, gold has held its value relatively well and fell by 3%, aligning with bitcoin’s performance.
Source: Bletchley Indexes, Tradingview (Coinbase)
During the previous two years, bitcoin has followed the stock market closely but with higher volatility. Given this dynamic, you would expect bitcoin to fall by much more than just 3% in a month when the stock market plummets. Bitcoin’s recent outperformance of the stock market in a weak period gives some hope to investors clinging to the digital gold narrative.October has opened relatively flat for the crypto market, but bitcoin is slightly outperforming relative to the other indexes.
No anxiety relief in sight for crypto market participants
Since late August, the Fear and Greed Index has been remarkably stable at "extreme fear" levels. During this period, the bitcoin price stabilized at around $19k with unusually low volatility. Historically, fearfulness in the crypto market has corresponded with high volatility, and we usually see greed increase as volatility settles. The recent fearfulness in such a low volatility environment indicates that market participants have an innate fear that we haven't seen the worst of this bear market.
Highest bitcoin spot volume since May 2021
Bitcoin’s trading activity keeps surging to new highs. The 7-day average bitcoin spot volume currently sits at $11.8 billion but peaked at $12.8 billion last week – the highest level since May 2021. Although most trading activity occurs at Binance, volumes have also been increasing on all the smaller venues lately. Bitcoin has traded with eminently low volatility recently, which is unusual in a period of such elevated spot volumes. We also see spot volumes in other currencies surging, particularly the British Pound.
Source: Tradingview
Bitcoin’s volatility plunges - Brace for impact?
During the previous seven days, the bitcoin price has mostly hovered in the narrow $19k - $20k range, leading the 7-day volatility to drop to 1.6%. Historically, a significant volatility burst has followed when the 7-day volatility has fallen to such low levels. Low volatility periods have tended to allow leverage to build up in the system. This leverage can be skewed either to the upside or the downside, but in either case, it makes bitcoin vulnerable to significant price movements. This is further confirmed by the open interest in perpetual futures sitting close to an all-time high.
Source: Tradingview (Coinbase)
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