Crypto Market Remains Indifferent, With Dwindling Volatility and Trade Volume

Crypto had another flat week from a price action perspective. The total market capitalization was up 0.62% (0.74% excluding stablecoins), currently at $1.15 trillion (or $1.02 trillion excluding stablecoins). BTC and ETH performed roughly in line and oscillated less than 4% throughout the week on thin volume.

‍

The positive highlights of the week among the more prominent names were memecoin SHIB, which announced plans to launch a digital ID feature, SOL, which continues to recover and sustain its status as one of the few large crypto assets with tripe-digit gains so far in 2023, and DYDX, which just launched its second testnet in its journey to launch its Cosmos-based appchain. On the other hand, OP was down almost 10% as it retrenched from the strong performance over the past few weeks fueled by strong activity on Optimism-based projects Worldcoin and Base.

‍

‍

The market overall remains indifferent. Whether that's one of the largest financial services companies in the world launching a stablecoin using public blockchain infrastructure or renewed excitement for futures-based ETH ETFs on the back of a flurry of new applications, both volatility and volume metrics continue to drop to multi-year lows (more on that below).

‍

The quiet price action contrasts with a macro environment that has been getting murkier over the past few weeks. On the one hand, the U.S. is balancing strong economic activity indicators with inflation potentially edging up in the short term due to higher gasoline and food prices. China just implemented a surprising interest rate cut and stopped reporting youth unemployment numbers after months of increases amid concerns about the overall health of their economy. Japan also reported 1.5% QoQ real GDP growth (6.0% annualized). The firm beat, however, came with some caveats as much of the growth came from external demand and could fuel market speculation about whether it's time to reduce the massive stimuli the BoJ has in place.

‍

And these events took place just over the past few days.

‍

Overall, while the improving trends and fundamentals in crypto continue to sustain optimism, it's a good time to keep a close eye on any potential spillover impacts from macro to broader risk assets and, by extension, crypto.

‍

Top Three Trends We're Watching

‍

FalconX Trading Desk Color: BTC and alts were the highlights of our trading activity last week, in which we generally saw flows skewed to the sell side. BTC traded 2.3x more than ETH, the highest ratio of the past two months. While 55% of our BTC flow was on the buy side, 58% of our ETH flow was on the sell side. Interest in alts remains elevated, with majors BTC and ETH trading less than alts for only the second week in the last five months. Alts flow generally tilted toward the sell side but varied across assets. We saw LTC, MATIC, and DOGE flow primarily on the buy side and SOL, OP, and BCH primarily on the sell side.

‍

‍

Crypto Goes Deeper Into its Low Volume, Low Volatility Mode: The 30-day annualized realized volatility for BTC and ETH stand at 16%. This is the lowest level recorded for BTC since the fourth quarter of 2016 and the lowest for ETH. To get a context of how extremely low these levels are, volatility levels below 20% have historically occurred only 1.7% and 0.1% of the time for BTC and ETH since 2016.

‍

‍

The low-volatility environment is underpinned by thin trade volumes both in the spot and futures markets. For example, under my favorite spot volume metric (3-day moving average of CoinMetrics trusted exchange volume), BTC and ETH just hit the lowest prints since October 2020. Alts spot volume, which until recently was showing relative strength, dipped this week and is now brushing the 2023 lows.

‍

Open Interest Build-Up in 2023 Suggests Whenever Volatility Returns, It Might Come Back With no Forewarning: The open interest in ETH and BTC futures (both perpetual and dated contracts) increased by over 50% to $18 billion so far in the year. As the chart below shows, this level is only 10% below the level before the FTX downfall.

‍

The aggregated open interest in BTC and ETH is still significantly below the levels of $30 billion and more seen in the most acute phases of the 2021 bull market. That said, the relatively high open interest level combined with extremely low volatility and trade volume could mean that whenever volatility comes back, it could happen suddenly and dramatically.

‍

Have a great week!