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Crypto On a Roll as Macro Backdrop Heats Up

Oct 18, 2021 · 5 min read

By Ashwath Balakrishnan

The Bulls are Back

  • BTC just recorded its highest weekly close on record last week; let’s let that sink in.
  • BTC ended the week at $63K on Sunday, topping the $61.5K weekly close on Apr. 6. Looking at the 1-year chart in weekly candles, last week was one of the most decisive uptrends since January 2021.
  • Weekly opens/closes tend to act as magnets for key price support and resistance levels. We’re already seeing a slight pullback to the weekly close in April and could see some deviation below to wipe out over-leveraged participants in the short-term.
Open Interest Is Nearing ATHs, But is it Cause for Alarm?

  • Open interest in BTC futures is nearing its all-time high, which has been a cause for concern for commentators on Twitter. Open interest growth reflects an increase in leverage. However, when the price of an asset is increasing, open interest measured in USD is bound to go up. Rising open interest as BTC closes in on its all-time high is only natural, as, quite obviously, the unit price of BTC causes the notional amount of positions to rise.
  • For all intents and purposes, BTC open interest is already at an all-time high. FTX, Binance, Bitfinex, and CME all hit their highest level of BTC futures open interest in the last few days.
  • The shortfall comes from Asian exchanges like Huobi and OKEx, which were market drivers in early 2021 but have seen open interest decline. Deribit and Bybit, both hotbeds for leveraged traders, are also yet to near their open interest all-time highs.
The Bright Side: Perp Funding Remains Reasonable

  • Perpetuals offer another litmus test on the market. Normally, a tell-tale sign of an overheated market would be ‘perp’ funding rates surging erratically.
  • However, current funding rates still look compressed when compared to early 2021. While funding is not exactly cheap–at 0.05% per day, it costs 18.3% to be long for a whole year at that rate–when the benefit from being long exceeds the cost, the choice is obvious.
  • We should expect funding to rise as the market continues to trend. But we haven’t reached the threshold where it costs an arm and a leg per day to be long BTC. This suggests worries about excessive leverage may be premature.
Macro Conditions Send Mixed Signals

  • In our view, major central banks aren’t yet finished when it comes to accomodative monetary policy.
  • The global economy has rebounded since the depths of 2020, in many ways far faster than many expected. As a result, policymakers have looked to scale back their involvement and “normalize” policy as the world shows signs of restoration. The outlook for global growth, however, is far murkier, as we noted in our recent analyst call for Institutional members.
  • For starters, key economic indicators have disappointed in recent months, portraying a weakening, rather than strengthening, recovery. The peak in global liquidity growth earlier this year preceded the peak in economic momentum, which occurred right around the same time BTC and the rest of the crypto market started to roll over in late April to early May; notably, investors’ risk appetite seems to have topped out around the same time.

  • Despite these growth concerns, the market is now pricing in at least two Fed rate hikes by the end of 2022 as inflationary pressures continue to build.
  • Fed Funds Rate Futures (in white) have begun to accelerate over the last few weeks. Fed Fund futures embody the markets’ view on where target interest rates will be set at the end of next year (we inverted the axis on the above chart to show the close relationship with the US dollar, so the recent increase means rate expectations are rising).
  • Meanwhile, the U.S Dollar index (DXY), in orange, has strengthened in recent months as expectations for tighter policy proliferate (DXY tracks USD against a basket of major currencies, with the euro making up the largest weighting). A stronger dollar also implies tighter financial conditions and often serves as a headwind to global growth, which as we know is a major threat to the sustainability of the economic recovery thus far; this could cause some trouble if the Fed gets too hawkish too early (i.e. tapering, raising rates).
  • For more context on these developments, see our recent report on the The State of Global Markets.
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