Assessing the state of the markets - Vetle's kool kornerWe’ve seen a strong overall market recovery in the crypto market, as bitcoin has made a push back above $40,000 last Friday. The entire crypto market is currently strongly correlated, signaling that we’re not witnessing any notable altcoin rotations as of now. This could indicate a cautious sentiment among traders, as traders are reluctant to move out on the risk curve chasing beta. We noted in our last report that the sell-off could be nearing an exhaustion point based on signals from the perpetual swaps market. We’ve since seen the momentum change. However, both the futures basis and funding rates remain unusually low. This suggests that leveraged traders are not eagerly optimistic over the recent strength in the market. Meanwhile, CME’s basis is trending up, having bottomed out alongside BTC’s Jan 24th bottom, while exchange-traded bitcoin products in the U.S. and Canada are also showing promising inflows. The tendencies from CME and the ETPs could indicate a brewing bullish sentiment among institutional traders.
Crypto market moving in tandem
Bitcoin is up 15% over the past seven days as optimism returns to the market (slide 6). Most of these gains came on Friday when bitcoin broke the $40,000 barrier. BTC, ETH and BNB have followed each other closely during the past seven days. Historically, ETH and BNB have tended to outperform BTC in high return periods. Still, the market has been fearful for a long time, and it looks like traders are waiting carefully to see what bitcoin does first before making specific bets on ETH or BNB. The 90-day correlation between BTC and ETH is the highest since June 2020 at 0.874. BTC’s correlation with the S&P 500 is decreasing, as the stock market was flat at the end of last week while the BTC price exploded.
The three biggest coins have followed each other closely lately, and so have most other coins. Still, we see tendencies to higher risk taking in the smaller altcoins. After being the worst-performing index in January, the Small Cap Index is the leader so far in February, seeing 19% gains. Behind it follows BTC and all the other indexes with 15% returns. In the increasingly less fearful market, risky bets in smaller coins have paid off. The high beta profile of the Small Cap Index is visible, with smaller coins outperforming the bigger coins on green days while underperforming on red days. XRP’s massive gains during the past seven days have increased its dominance to more than 2% for the first time since November. In January, the market shares of the stablecoins USDT and USDC exploded as crypto traders looked for a safe place to hide while the bears tore the market apart. So far in February, both these stablecoins have lost significant market shares, showing how traders are rotating back out on the risk curve.
Source: NYDIG, Bletchleyindexes.com
Optimism returning to the market
Market sentiment continues improving, showcased by the Fear and Greed Index rising to 48, only two points shy from the “Greed” area. The last time the index signaled “Greed” was at the end of November. After spending almost three months in a state of fear and misery, the more comfortable “Greed” area should be highly welcomed by tired hodlers.
Source: Alternative.me, NYDIG
The bitcoin price is rising on low volumeOver the past seven days, bitcoin trading volumes have been unusually muted, considering that the bitcoin price has risen on high volatility. Limited liquidity may have contributed to the rising bitcoin price as outsized buying orders in thin order books tend to push up prices. Last Friday, the bitcoin price increased 11%, and this day saw a spot volume of less than $7 billion. If volumes grow, will there be enough buying power in the market to keep pushing up the bitcoin price?
Seven days ago, bitcoin's 7-day volatility was at its lowest point since November 2020. We then informed that bitcoin breaking through or falling below crucial resistance and support levels might be catalysts for increased volatility. On Friday, as bitcoin broke through the $40,000 resistance, the price increased 11%, the most significant daily gain in eight months. Last week's price action is a reminder that high volatility doesn't necessarily unfold itself to the downside for bitcoin.
Source: Tradingview (Coinbase)