A funny thing happened to Bitcoin when interest rates started to rise: trading volumes went down.
A funny thing happened to Bitcoin when interest rates started to rise: trading volumes went down. Now, market watchers are grappling with the implications and what a world of less lax monetary policy means for digital assets.
Aggregate 30-day moving average volume for Bitcoin on Coinbase, Bitfinex, Kraken and Bitstamp is at its lowest level since August 2021, according to data compiled by Strahinja Savic at FRNT Financial. Over the past month, aggregate daily volume at these locations averaged just over $1 billion. That reading stood at $2.57 billion in May 2021, a decline of nearly 60%.
This came as the Federal Reserve and other central banks stepped up their fight against inflation, which has remained hotter for longer than many expected. With rates rising and the cost of money no longer hovering around zero, cryptocurrency prices have declined, prompting investors to recalculate their desires to invest in the high-end market.
On the one hand, withdrawing liquidity affects volumes in cryptocurrencies – and elsewhere – by reducing available funds to invest, says Noelle Acheson, head of market insights at Genesis Global Trading. Second, higher fees increase the opportunity cost of investing in non-yielding assets such as Bitcoin. And those who buy the currency using leverage may feel an extra squeeze: Higher borrowing costs change the risk-return scenario of such trades, meaning your potential return drops as your costs rise.
“Volumes have dropped because of uncertainty,” she said. “Investors seem to be worried that things could get worse before they get better.”
Acheson notes that the percentage of Bitcoin that hasn’t moved in over a year is on the rise, with around 76% of the currency held at addresses deemed illiquid, meaning they exhibit little movement.
While this may show conviction in the idea that Bitcoin can be used as a store of wealth in an environment of “intensifying macroeconomic uncertainty and unrest”, for now, “price movements are determined by the risk preferences of macro investors who are concerned about the global market. rates and economic prospects”.
Data from Glassnode suggests that interest in Bitcoin has remained muted – on-chain measurements indicate little growth in the coin’s user base and minimal inflows of new demand. Additionally, Bitcoin is stuck in a tight trading range as it is largely dominated by HODLers, a term that refers to investors who have the good sense to stick around during major bouts of volatility.
The research firm’s strategists say that “it is difficult to find many observations that suggest that the network’s user base is recovering or growing strongly.” They cite the number of active entities, something akin to daily active users – this measure is stuck in the same bear market channel it has been mired in for six years.
David Shafrir, CEO of SDM, an institutional OTC trading desk, says he is seeing new clients arriving, but that average pre-existing client volumes have dropped by 8% to 15%. A slowdown in consumer power is a factor behind this, as is uncertainty surrounding the Fed’s reaction to persistently high inflation.
That “caused some significant insecurity across the market as a whole,” Shafrir said by phone. “Now we are starting to see the effects of that.”
As is the case with other asset classes, Bitcoin needs new supporters for prices to stabilize. The emergence of new cryptocurrency fans – institutional and retail – over the past couple of years has coincided with a spike in prices. Bitcoin is up more than 300% in 2020 and another 60% in 2021. That desire to be in the asset class may have changed – so far this year, it has lost more than 10% amid a similar drop in other riskier assets, with analysts saying it will take an entirely new catalyst to lift prices once again.
“We are not receiving follow-up from new investors. Despite the relentless publicity, most of those who were inclined to buy Bitcoin have already done so,” said Steve Sosnick, Chief Strategist at Interactive Brokers LLC. Ultimately, Bitcoin is a risky asset and will behave in the same way as other risky assets, he said.
One oft-cited measure is Bitcoin’s correlation with other areas of the traditional market that could be hurt in an environment of rising fees. The 90-day correlation coefficient for the currency and a basket of unprofitable tech stocks is now above 0.60, the highest reading on record. (A coefficient of 1 means assets are moving in sync, while minus -1 would show they are moving in opposite directions.)
Meanwhile, Bank of America’s Alkesh Shah and Andrew Moss in an April 12 note said that Bitcoin exchange outflows in the previous week totaled $1.2 billion and were the highest for the year. In the previous week, investors withdrew $532 million. Overall, currency outflows in recent weeks have been many times higher than the average outflows seen during the weeks of early February and early March. Strategists say the trends “indicate that investors are HODLing”.
Still, Russell Starr, CEO and executive chairman of DeFi Technologies, says Bitcoin is more of an inflation hedge than a risky asset. Inflation is likely worse than current readings are reflecting, he says, citing a common refrain in the cryptocurrency community. The US could go into recession and that would spur the Fed to ease monetary policy again, he said.
“Yes, you can see some weakness in the short term,” he said over the phone. But ultimately Bitcoin, in this scenario, “tests $60,000, $70,000, $80,000, $100,000.”