Fri. Jan 21st, 2022

The world’s largest cryptocurrency has shrunk by about $ 47,000, well below early November’s highs of almost $ 69,000.

The malaise around Bitcoin extends much deeper than its price.

The world’s largest cryptocurrency has shrunk by about $ 47,000, well below early November’s highs of almost $ 69,000. A peek under the hood helps explain why: Trading volumes have dried up, open interest rates on futures contracts are falling and the number of active addresses came to a halt.

In summary, the data paints a picture of diminished animal spirits after Bitcoin peaked after the fall launch of the first U.S. futures exchange-traded funds. Dip buyers – a once reliable match in cryptocurrency markets – have yet to reappear significantly, even after a 33% withdrawal. Meanwhile, after billions of dollars’ leverage in last month’s flash crash washed out, new investors still have to fill the gap.

“There was a lot of leverage in the system in May and then in the run-up to November,” says Jim Greco, a managing director at Radkl, a crypto-trading firm. “There can be a lot of people who have been flushed out and they need to be replaced with new capital.”

Saggie volume

Trading activity in Bitcoin declined as enthusiasm waned. After declining for months, volume on stock exchanges on Tuesday was only $ 4.8 billion, according to data from Kaiko compiled by Messari. This is lower than $ 13.1 billion a year earlier, and is well below the one-year average of about $ 9.2 billion.

A graph of Bitcoin trading volume measured by total US dollar value[Bloomberg]

Volume has not broken more than $ 10 billion since December 4, when the price of Bitcoin fell by more than 20% in a matter of minutes in a display of the currency’s infamous weekend volatility. About $ 2.4 billion worth of crypto exposure, both long and short, was liquidated during the downturn, according to data from Coinglass.com.

“We’ve seen a number of U.S. funds, prop stores and hedge funds basically put risk back in the last hours of the year, but what we’ve seen this year is that volumes are relatively lower compared to the beginning of last month.” said Aya Kantorovich, head of institutional coverage at FalconX. “I think what we’re seeing is still this question, ‘Are we still a risk-off or a risk-on?’

Fizzling Futures

The futures market tells a similar story. After rising to a high of $ 17.4 billion at the end of October, open interest rates on Bitcoin futures on the Chicago Mercantile Exchange are now about $ 10.6 billion – a 39% drop.

The start was in anticipation of the first US Bitcoin futures ETF, which debuted in mid-October as one of the most traded funds on record. However, enthusiasm waned rapidly – after assets under management in the ProShares Bitcoin Strategy ETF (ticker BITO) attracted more than $ 1 billion in just two days, standing at $ 1.2 billion.

A chart showing declining open interest rates - a measure of total contracts that have not yet been liquidated - on Bitcoin futures contracts

“The launch of the fund correlates strongly with increased open interest in CME, as AUM has increased rapidly in the first week since launch,” Sam Doctor, Chief Strategy Officer and Head of Research at BitOoda, wrote in a note. Open interest “has recently fallen back to pre-ETF launch levels in the last week of December, although we expect OI to climb again on the road to the holidays.”

Absent address

In the midst of the malaise, the growth of active addresses – a measure of trading activity – also came to a halt. The score currently stands at about 971,000, down from 1.2 million a year ago, according to CoinMetrics data compiled by Messari.

For Kantorovich, this could pave the way for a short, sharp liquidity squeeze similar to December’s flash crash.

A chart showing declining growth of active addresses for Bitcoin, which serves as a measure of trading activity[Bloomberg]

“The less active addresses you have, can mean the more assets are stored in cold storage. The less tradable Bitcoin, the more volatility you can expect in return, as liquidity on order books decreases, ”Kantorovich said. “I think you can see a very rapid, very short flash collapse that is rapidly reducing open interest in the market, similar to what we saw in December.”

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