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Edited by Yamini003 at 22-12-2023 04:02 PM
Global Market Overview: The characteristics of the digital asset market in October were marked by strong expectations for regulatory developments, especially the potential approval of spot Bitcoin ETFs, driving increased institutional interest. Bitcoin led the bullish trend, appreciating by 28% month-over-month and surpassing a year-to-date increase of over 108%, reaching a peak dominance of 53%, the highest since April 2021. Other cryptocurrencies, such as Solana, also showed impressive gains, indicating a broader market recovery.
Market Dynamics: The potential approval of spot Bitcoin ETFs may bring a significant influx of new demand from institutional investors. Our analysis suggests that this new demand has had a significant impact on market dynamics, given Bitcoin's general long-term holding pattern and the resulting scarcity of tradable supply. We explore this point through comparisons with gold ETFs and in-depth on-chain analysis, focusing on expected capital inflows and the actual supply dynamics of Bitcoin.
On-chain fundamentals: Glassnode classifies Bitcoin investors into Long-Term Holders (LTH) and Short-Term Holders (STH) based on holding patterns. LTHs hold their investments for over 155 days and tend to accumulate during bearish trends and sell during market strength. In contrast, STHs, with holdings less than 155 days, react more sensitively to short-term market changes. This classification aids in market analysis, trading strategies, and risk management, providing insights into different investor groups and market cycle stages.
Global Market Overview: A One-Month Review of On-Chain Data and Derivatives Markets in October
October was a crucial moment in the digital asset market, characterized by enhanced expectations for regulatory developments, especially around the approval of spot Bitcoin ETFs, and increased institutional participation, leading to a significant surge in CME Bitcoin futures trading volume.
As a result, Bitcoin (BTC) led the bullish trend, with a month-over-month increase of over 28%, marking a year-to-date performance of over 108%. This was also reflected in the continued upward trend of Bitcoin dominance. This metric represents the percentage of BTC market capitalization to the total market capitalization of digital assets, reaching a peak of 53% in October, the highest since April 2021.
BTC Dominance
While Ethereum lagged with a relatively modest 8.72% rise, some mature small-cap assets made significant progress, surpassing the performance of the two market leaders. Impressive performances from cryptocurrencies like Solana, surging by 79.05%, indicated that the recovery had expanded to other market sectors.
Overall, the positive trend affected most digital assets, as reflected in index movements designed to capture broad market momentum, such as the Bloomberg Galaxy Crypto Index or the CoinDesk Market Index, both growing by over 20%.
As mentioned earlier, the upward trajectory of the market was primarily driven by expectations of spot BTC ETF approval, significantly influenced by filing updates from major financial entities like Invesco and BlackRock. According to Bloomberg's analysis, the likelihood of spot BTC ETF approval before January 10 (the final statutory deadline for the SEC to decide on certain applications) was 90%.
A key factor increasing the chances of spot BTC ETF approval is the SEC's recent inaction following a court order. In October, the U.S. Securities and Exchange Commission (SEC) did not appeal an important court ruling requiring a review of Grayscale's Bitcoin ETF application. This lack of action indicates a potential shift in the SEC's stance, as it now needs to reevaluate the application without relying on previous reasons. This development significantly influenced market optimism regarding the likelihood of spot BTC ETF approval.
This optimism, especially from institutional market participants, is evident in the growth of open interest in CME Bitcoin futures. This trend continued into November, with the exchange holding a 27.8% relative dominance of Bitcoin futures open interest. At these levels, CME has become the preferred venue for Bitcoin futures trading, surpassing Binance for the first time in two years. This indicates a significant increase in institutional investor participation in the derivatives space, showing their growing acceptance of digital assets and their integration into mainstream financial portfolios.
BTC: CME Futures Open Interest Dominance
Similarly, institutional participation is evident in the options market. In October, open interest in bullish Bitcoin options surged by $4.3 billion, an 80% increase, surpassing $9.7 billion. The scale of activity in the options market is now comparable to the futures market, signaling market maturity. It reflects a more sophisticated investment strategy, often associated with professional and institutional traders who increasingly use these tools for long-term Bitcoin investments.
Bitcoin: Open Interest in Bearish and Bullish Options Contracts
From an on-chain analysis perspective, institutional entities' interest in Bitcoin is growing, while there is an increase in holding behavior among long-term investors who have a firm belief in the asset.
Therefore, in October, the available tradable supply of Bitcoin significantly tightened, with long-term holders holding a historical high of over 76% of Bitcoin's circulating supply. This means that over two-thirds of the circulating supply has not been traded for at least five months.
Bitcoin: Supply Held by LTH vs. STH
Similarly, we note an increase in non-liquid supply compared to exchange balances, indicating that many market participants are transferring their assets from liquid exchanges to non-liquid HODLer wallets—addresses with almost no spending history. In fact, this suggests that while trading volume has increased, market liquidity remains relatively low.
Bitcoin: Non-Liquid Supply (BTC)
This trend is noteworthy as it indicates that long-term holders, usually more experienced investors, have firm beliefs in the current price trend. Although these market participants have substantial unrealized profits, they are unwilling to cash out—indicating a belief in the continuation of the upward trend.
Changes in correlation and the (re)appearance of the "Quality Hunt" narrative
Considering the continuous reduction in Bitcoin's tradable supply and the growing interest from new market participants (especially those from traditional financial backgrounds), the confidence of long-term holders in this trend seems justified. This emerging demand appears to be validated by influential figures like Stanley Druckenmiller, Paul Tudor Jones, and BlackRock's Larry Fink, who recognize Bitcoin's potential as a "quality asset."
In turn, this narrative is increasingly being validated by data. After escalating geopolitical tensions and increased macroeconomic uncertainty, Bitcoin's attractiveness as digital gold can be seen in its changing correlation with traditional assets. As of October, the average 30-day correlation between Bitcoin and gold was 0.65, reflecting similar price trend patterns. Although the correlation weakened by November 30, the 90-day trend remained unchanged:
Bitcoin: Correlation with Gold
This correlation contrasts sharply with the negative correlation Bitcoin has with traditional stock indices such as the S&P 500 and the Nasdaq Composite. This difference highlights Bitcoin's increasing attractiveness as a diversification tool and a hedge against market volatility in traditional financial markets.
As we navigate these evolving market dynamics, the focus on the expected approval of spot BTC ETFs becomes a key focal point. The next part of our analysis will explore its potential impact on Bitcoin demand, supply, and pricing. We will compare it with the launch of gold ETFs and highlight crucial on-chain indicators that will help professional traders and investors understand how this anticipated development might translate currency demand into price movements. These tools can assist institutional market participants in predicting how the approval of spot BTC ETFs may affect the investment landscape of Bitcoin and may reflect the transformative impact of ETFs on the gold market.
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Post time 26-11-2023 13:48:43