Investor interest in bitcoin has waned, with trading volume on exchanges at its lowest level since August.
As interest rates have risen, an interesting thing has happened in the bitcoin market: trading volumes have plummeted. Market watchers are now grappling with the implications and trying to understand what a less loose monetary policy means for digital assets.
Coinbase, Bitfinex, Kraken and Bitstamp's 30-day cumulative moving average trading volume is at its lowest since August 2021, according to FRNT Financial. Daily turnover on these exchanges averaged just over $1 billion in the past month, down nearly 60 percent from $2.57 billion in May 2021.
It comes as the Fed and other central banks accelerate their fight against inflation, which has lasted longer than many expected. As interest rates rise and borrowing costs no longer hover near zero, cryptocurrency prices have fallen back, prompting investors to reconsider their continued exposure to the frontier market.
For one thing, the withdrawal of liquidity reduces the amount of money available for investment, affecting Trading volumes in cryptocurrencies and elsewhere, says Noelle Acheson, head of market insights at Genesis Global Trading.
Second, higher interest rates increase the opportunity cost of investing in nonyielding assets like Bitcoin. And those who use leverage to buy bitcoin may feel extra pressure: Higher borrowing costs alter the risk-reward profile of such transactions, meaning that bitcoin's potential return falls as the cost-reward ratio rises.
Trading volumes are down because of the uncertainty, she says. Investors seem to be worried that things will get worse before they get better.
Aitcheson noted that the percentage of Bitcoin addresses that have not been traded for more than a year is at an all-time high, and that about 76% of bitcoins are considered illiquid, meaning they are barely traded.
While that might make it plausible that Bitcoin could serve as a store of wealth in an environment of "heightened macroeconomic uncertainty and volatility," for now "its price movements are driven by the risk appetite of macro investors focused on global interest rates and the economic outlook."
Data from Glassnode suggests that interest in bitcoin remains subdued. On-chain data shows that the user base has barely expanded and the volume of new demand is small. In addition, bitcoin has been trading in a tight range because the trading price is dominated by HODLers (long-term holders).
Strategists at Glassnode say it is "hard to find many signs that the web user base is recovering or growing strongly". They cite the number of active entities (similar to the number of daily active users), which is stuck in a bear market channel it has been stuck in for six years.
David Shafrir, chief executive of SDM, an institutional over-the-counter trading desk, says he has seen new clients join, but average volumes from existing clients have fallen by 8% to 15%. The decline in spending power is one factor behind this, as is the uncertainty surrounding the Federal Reserve's response to persistently high inflation. Shafrir said.
"It created some huge insecurity in the market as a whole, and now we're starting to see that impact."
As with other asset classes, bitcoin needs new backers to stabilize its price. The emergence of new fans of cryptocurrencies in the past two years has coincided with an explosion in prices. Bitcoin rose more than 300% in 2020 and another 60% in 2021. But things are different now. Bitcoin has fallen more than 10% this year as other riskier assets have plummeted. Analysts say a whole new catalyst is needed to spur prices higher again.
"We're not getting follow-through from new investors," said Steve Sosnick, chief strategist at Interactive Brokers LLC. Despite the advertising, most of those inclined to buy bitcoin have already done so."
Ultimately, Sosnick believes bitcoin is a risky asset that will follow other risky assets.
One oft-cited measure is bitcoin's correlation with other parts of the traditional market, which typically suffer in an environment of rising interest rates. The 90-day correlation between bitcoin and a basket of nonprofit tech stocks is now above 0.60, the highest reading on record.
Meanwhile, Bitcoin exchanges saw outflows of $1.2 billion in the previous week, the largest so far this year, Bank of America's Alkesh Shah and Andrew Moss said in an April 12 report. The week before that, investors pulled $532 million. Overall, outflows from Bitcoin exchanges in recent weeks have been many times greater than the average outflows seen in early February and Early March. The trend 'suggests that investors are HODL', say strategists.
However, Russell Starr, CEO and executive chairman of DeFi Technologies, said bitcoin is more of an inflation hedge than a risk asset. He said inflation could be worse than the current readings reflect, citing a common refrain in the cryptocurrency community that "the US could slip into recession, which would spur the Fed to ease monetary policy again". He said:
"Yes, you may see some short-term weakness. But eventually, bitcoin will test at $60,000, $70,000, $80,000, even $100,000."