Exploring the Crypto Landscape

Disclaimer: This is not financial advice and should not be taken as such. This is merely an opinion article.

Introduction

 

The year has started on a high note for Bitcoin, with significant developments occurring over the past two weeks. Notably, the announcement and release of Spot Bitcoin ETFs (Exchange-Traded Funds) have marked a pivotal moment in the integration of traditional finance (Trad-Fi) and cryptocurrency. Major players in Trad-Fi, such as BlackRock, Fidelity, VanEck, and Invesco Galaxy, ARK Invest, along with crypto-native Grayscale, have launched their Spot Bitcoin ETFs. Trading commenced on Thursday, January 11th, generating an impressive $7 billion in volume within the first two days. BlackRock and Grayscale emerged as the most liquid offerings. However, the crypto market has experienced considerable volatility following the ETF releases.

Bitcoin, in particular, saw its most significant decrease in months, dropping over 9% on Saturday the 13th. This downturn may be attributed to a 'buy the rumor, sell the news' event. Much of the market remained muted upon the ETF release, anticipating significant movements. This was in part due to a prior incident where the SEC's X.com account was hacked as can be read about here, resulting in a fake announcement that led to little price movement which may have led investors not to rally on the official announcement. In contrast to Bitcoin's decline, Ethereum saw a notable uptick. On the day of the announcement, Ethereum's value increased by 7%, driven by speculation that it might be the next candidate for a Spot ETF.

This development has sparked a debate regarding the overall impact of Trad-Fi's entrance into the cryptocurrency sector. While some see potential benefits, the future regulatory landscape remains uncertain, especially for retail investors who might face exclusion from the market.

Price movements

Figure 1: UTXO for bitcoin

On the day of the ETF announcement, Bitcoin experienced a significant increase in spot selling, as evidenced in Figure 1. This chart shows a rise in UTXO volume, indicating that older Bitcoin wallets, possibly belonging to larger investors or 'whales', were active. This activity suggests that these investors interpreted the SEC announcement as a signal to sell, rather than buy. This interpretation was later corroborated by Bitcoin's subsequent price decline. As traditional finance (Trad-Fi) continues to merge with the cryptocurrency sector, there is growing concern that retail investors might be increasingly marginalised.

This concern stems from the potential for stringent and exclusive regulatory laws, akin to those in traditional finance, which could limit public access to cryptocurrency investments. While recent years have seen tighter regulations, there has been no significant change yet in regulations specifically governing who can invest in cryptocurrencies. Contrastingly, Ethereum displayed more dynamic price movements following the Bitcoin ETF announcement. The launch of the Bitcoin ETF is perceived as a harbinger for potential altcoin Spot ETFs, with Ethereum being a prime candidate due to its size and stability, second only to Bitcoin. This speculation has triggered Ethereum's most significant price movement in the last three months, as shown in Figure 2.

Figure 2: Price for Ethereum january 17th

Prior to this, sentiment towards Ethereum had been at a low, affected by factors like high gas fees and the emergence of competing blockchains like Solana and Celestia. However, this recent positive price impact has rekindled trader interest in Ethereum, as illustrated in Figure 3.

Figure 3: Average transaction for Ethereum january 17th

In recent days, there has been a noticeable uptick in Ethereum usage, aligning with its positive price trend. This increased attention to the blockchain could be a precursor to sustained growth. Looking ahead, the potential introduction of an Ethereum Spot ETF might create a lucrative opportunity for traders, similar to the scenario observed with the Bitcoin ETF. The anticipation surrounding this potential development could drive further positive momentum for Ethereum in the coming months.

Increased open interest?

The introduction of a Bitcoin spot-ETF presents an interesting dynamic in market interest, as analyzed by the team at wevr.ai. With this new development, trading firms now have the opportunity to allocate liquidity and speculate on Bitcoin's price movements more directly. This is expected to increase open interest in Bitcoin, particularly during traditional trading hours. However, a notable point of consideration is the discrepancy between trading hour and non-trading hour volatility.

The increased open interest during trading hours could lead to a significant reduction in activity outside these american timezone hours. This pattern is already observed in the market, but the team at wevr.ai anticipates that the Bitcoin spot ETF might amplify this trend. Evidence of this was seen in the first two days of trading, where there was initially considerable open interest with many traders actively bidding on Bitcoin. Yet, a notable reduction in open interest occurred after the first day and a subsequent price crash occurred outside of trading hours on Saturday the 13th of january.

Contrary to the anticipated increase in volatility due to the spot ETF, wevr.ai posits that it might actually lead to decreased volatility in the long run. The rationale behind this is the entry of more sophisticated market makers from the traditional finance (Trad-Fi) sector. As these entities bring advanced Trad-Fi technology and strategies into the cryptocurrency space, the market is expected to become more competitive. This increased competition could result in less opportunity to capture 'alpha' – the excess return on an investment relative to the return of a benchmark index.

An interesting observation noted by @Capital15C highlights the market dynamics following the introduction of the spot ETF. While there has been a positive net flow of Bitcoins toward these Trad-Fi firm-owned ETFs, such as BlackRock , however notably for Grayscale there has been a significant decrease in their Bitcoin holdings. This suggests a complex interplay of market forces potentially relating to their high fees and investor behaviors in response to the new investment vehicle, warranting close observation and analysis as the market continues to evolve.

Figure 4: ETF Netflows credits : @Capital15C

The future outlook?

The future outlook for the cryptocurrency market appears to be shaped by increasing regulation and heightened competition. As the industry continues to mature and regulatory frameworks become more established, it's becoming increasingly challenging to achieve significant gains, especially for individual or retail traders. Looking ahead to 2024, the market is expected to enter a more competitive bull market.

Opportunities for profit are likely to arise swiftly but will also be quickly capitalized upon by the market participants. This rapid consumption of opportunities is indicative of a market that is becoming more efficient and sophisticated. An example of this fast-paced dynamic can be seen in events like the Solana phone airdrop. This particular opportunity was quickly recognized by the market and evaporated in a short span of time. While this event is not directly related to bitcoin or ethereum trading, it serves as a microcosm of the broader trend: as the cryptocurrency industry evolves, we are likely to see reduced volatility and narrower windows for profit, particularly for the average retail trader. This suggests that future success in the cryptocurrency market may require more nuanced strategies, deeper market understanding, and quicker response to emerging opportunities. It also implies that the barrier to entry for profitable trading could become higher, as the market becomes more akin to traditional financial markets in terms of competition and professionalisation. The team at wevr.ai has a large range of analytical tools able to be equipped to help analyse the market quicker than your competitors!

Conclusion

As always this is a very exciting time to be investing in cryptocurrencies, and the team at wevr.ai expects bitcoin and cryptocurrencies to continue being talked about in the mainstream this year as we creep closer to bitcoin halving. Be sure to sign up at https://wevr.ai/ and check out our pricing page. As we have multiple feature launches in the upcoming months.