Sygnum Market View – 27 May 2020
Markets rally as lockdowns ease and investors shift to “risk-on” mode
FTX launch hash rate futures, new Bitcoin market sophistication good for miners
What the Bitcoin outflow from exchanges means for volatility and response times
Prospect of economic recovery shifts investors into ‘risk on’ mode
Countries around the world have started to tentatively ease their lockdown restrictions and the first human trial for a COVID-19 vaccine has produced positive results. These recent developments provide the prospect of economic recovery, and investors appear to be shifting to ‘risk-on’ mode once again. The Dow Jones and S&P 500 continued to rise from the week before, both increasing by 3 percent over the course of last week, while Gold and Bitcoin saw a tapering after a strong run in the past two weeks.
The positive funding rate on BitMEX dropped significantly as the bulls started to fade with a drop in Bitcoin price. Nevertheless, the open interest on futures and options at CME continues to hover around the all-time high. Reduced selling pressure from miners could continue to act as a bullish catalyst attracting institutional investment.
New hash rate futures by FTX enables Bitcoin miners to manage revenue streams
Mining derivatives remains a hot topic following Bitcoin’s halving on 11 May this year. The mining difficulty determines how much computing, or hashing, power, miners require to successfully validate a block – unhedged exposure to this is a risk to miners and creates uncertainty in their future revenue streams. Demand for this became more prominent in the run up to the halving with the expected squeeze in profitability for miners.
Cryptocurrency derivatives exchange FTX is the first major name to launch a futures product on Bitcoin’s hash rate, reflecting the growing financial sophistication of the market. The expiration value of these futures is based on the average difficulty of all Bitcoin blocks mined during the respective quarter. The current difficulty level is at 15.1 trillion and the market is contango at 17.0 trillion for 2020 Q3, 18.4 trillion for 2020 Q4, and 20.4 trillion for 2021 Q1.
Players dominating this market – miners, mining equipment suppliers, etc. – are the ones who directly influence the very underlying they are trading on. Their short-term interests are opaque and the market is illiquid. While the availability of hash rate futures could bring greater certainty to mining revenue streams and reduce selling pressure, Bitcoin market dynamics are complex and it is difficult to assess what the long-term implications will be at this point. We will continue to watch this space and its evolution over the coming months.
Outflow of Bitcoin from exchanges could increase volatility
An interesting dynamic that we have been witnessing over the last few months is the outflow of Bitcoin from exchanges. A potential reason for this is concerns over security and availability, which may be heightened by the recent outages at exchanges such as Coinbase (at the end of April) and BitMex (in March) – leading investors to move their cryptocurrency holdings into personal wallets or institutional-grade custody solutions.
The withdrawal of assets may indicate an increase in long-term investors of Bitcoin as this reflects investors’ plans to hold coins for a longer duration, hence reducing the need to keep them accessible on exchanges. However, the reduction of digital assets stored on exchanges could result in less liquidity and delayed responses to significant market moves, thereby increasing volatility.
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