Bitcoin Market Dynamics See Change After BTC Reward Halving

One month has passed since the 2020 Bitcoin (BTC) miner reward halving, and a lot has happened for the predominant cryptocurrency since then. From changes in investor and trader behavior to an exponential growth in institutional interest, the halving seems to have marked the start of a new reality for all Bitcoin market participants.

Although the halving did not come with the immediate price surge that many had associated with the event, there are a few key factors that indicate the start of some changes that may be here to stay, some of which may even be pivotal for the future of Bitcoin as a new asset class. 

In fact, some believe that 2020 has all the fundamentals to be a great year for Bitcoin in terms of price and visibility. A recent report by Bloomberg even expects Bitcoin to outperform its record prices from 2017 and go as high as $28,000. Recently, Simon Dedic, a co-founder of cryptocurrency analysis company Blockfyre, even went as far as to say that $150,000 could be a target in the case of a bull run. 

Institutional interest

Although the start of 2020 showed decreasing volumes for regulated Bitcoin derivatives on the Chicago Mercantile Exchange, this trend seems to have been completely reversed following the halving, which came shortly after veteran hedge fund manager Paul Tudor Jones showed his appreciation for Bitcoin and revealed a stake in the digital asset, stating: “The best profit-maximizing strategy is to own the fastest horse. If I am forced to forecast, my bet is it will be Bitcoin.”

Data from Skew reveals that Bitcoin derivatives on the CME started to post record figures shortly after the halving. This trend continued throughout the month of May. According to the CryptoCompare May exchange review, volumes for CME Bitcoin derivatives soared 59% and hit $7.2 billion. The document reads:

“CME total options volumes reached an all-time monthly high of 5986 contracts traded in May. This figure represents 16 times that of April’s volumes. CME futures volumes have also recovered since April, increasing 36% (number of contracts) to reach 166,000 in May.”

Following the news of the 3iQ Bitcoin fund listed on the Toronto Stock Exchange roughly a month before the halving, Grayscale revealed that their crypto funds brought in over $500 million in the first quarter of 2020, signaling that institutional interest continues to populate headlines. 

On June 10, the London-based ETC Group announced the listing of the first crypto exchange-traded product on Germany’s Xetra digital stock exchange and a recent survey published by Fidelity has found that more than one-third of institutional investors globally are long on digital assets like Bitcoin, with 80% of all investors surveyed finding this asset class appealing to some degree. Cointelegraph asked Jonathan Hobbs, the chief operating officer of digital asset hedge fund Ecstatus Capital, for his views regarding the rationale behind the recent institutional interest in BTC. Hobbs stated:

“The Fed’s bond buying program has increased its balance sheet by about $6 trillion since the 2008 financial crisis, with about half of that coming from its fourth round of QE earlier this year. As a result, more investors are seeing Bitcoin as a potential hedge against inflation. The Bitcoin halving has certainly played into this narrative. Institutions are also seeing Bitcoin as an uncorrelated asset with good risk to reward.”

Decoupling from traditional markets

Correlation with traditional markets, both in stocks and gold, has been a major point of discussion in the Bitcoin world and one that intensified greatly before the halving and following the Black Thursday crash on March 12. While some pointed to the correlation between Bitcoin and the stock market as a breaking factor for the “digital gold” comparison, it’s worth noting that all markets tended to trade in a fairly correlated manner amid the coronavirus crisis.

While the correlation between the Bitcoin and stock markets remains and with Bitcoin’s correlation with the S&P 500 having reached its highest point since January 2011, data suggests that the relationship between major markets and Bitcoin tends to shifts just before and after each halving event, which means that investors may continue to see a decoupling from stocks in the second half of 2020, especially as the effects of the pandemic decrease. 

In fact, Bitcoin has been outperforming the stock market in the second quarter, boasting returns of more than 50%. According to Matt D’Souza, CEO at Blockware Solutions and hedge fund manager, the correlation may come back as Bitcoin matures as an asset class. He stated:

“I think as more institutions get involved, the more correlated bitcoin will get with other assets. when the same people start owning the same assets or have access to the same assets is when you start to see correlations develop.”

Derivatives are growing — looming danger?

While institutional interest and relation to legacy markets can serve as an outlook of what lies ahead for Bitcoin following its third halving, the unregulated market continues to dominate BTC, particularly derivatives, which have seen substantial growth in terms of trading volume. Although volume has been rising, market data doesn’t seem to point to a clear price direction following the pre-halving bearish trends. 

According to CryptoCompare, global derivatives trading increased by 32% in May, reaching an all-time high of $602 billion. Much like previous months, options continue to see an increasing demand, with the Deribit Options volume rising by 109% to $3.06 billion in May.

As derivatives keep growing, some seem to be worried they can cause unnecessary volatility due to highly leveraged positions that cause long squeezes, where a sharp drop in price causes positions to be liquidated and brings the price further down, a scenario that was also witnessed during the March 12 crash.

Concerns that the growing interest in Bitcoin derivatives will lead to an unhealthier market do not stop there. Su Zhu, the CEO of Three Arrows Capital, recently stated that patterns like the one observed on June 1, dubbed the “Bart Simpson” pattern due to its resemblance to the cartoon character, are mostly due to the volume and interest on Bitcoin derivatives exchanges that allow for manipulation:

“I see it as the fact the vast majority of Bitcoin being held off these exchanges [...] and it’s not being traded around, so a very small amount of the Bitcoin that are out there are moving the price.” 

A “Bart Simpson” pattern in BTC

On-chain metrics paint a pretty picture

In fact, on-chain metrics have also showcased that these patterns have been connected to large movements by a few whales to Binance and BitMex. CryptoQuant CEO Ki Young Ju previously stated: “Multiple significant BTC inflows from Binance and BitMEX a few hours before the dip.”

While large inflows to derivatives exchanges and liquidated positions on said exchanges are a concern for the future price of Bitcoin, on-chain metrics also reveal another bullish sign for the digital asset. Investors are moving their Bitcoin away from exchanges in record-breaking numbers, a factor that has preceded positive price action for BTC before.

In the week after the halving, reserves across 17 major exchanges totaled 1.18 million BTC — the lowest value since November 2018 — signaling that investors are planning to hold their BTC for some time. On June 8, an additional 27,000 BTC was withdrawn from exchanges than was deposited. The last time there was such a significant outflow, Bitcoin appreciated by 88%.

Stablecoins

The day after the halving also marked the day that United States dollar-backed stablecoin Tether (USDT) surpassed XRP as the third-largest cryptocurrency by market capitalization, according to the Stablecoin Index. The growth in USDT follows its trend from pre-halving days, and still accounts for ~98% of all BTC-to-stablecoin volume.

Research has shown that there’s a positive relationship between the issuing of USDT and the Bitcoin price, and although stablecoin volume slowed down in April and May, according to CryptoCompare, the growth in USDT issuance still bears a positive outlook for the short and medium-term. Brian Quinlivan, marketing and social media director at cryptocurrency data provider Santiment, recently told Cointelegraph:

“When people aren’t using USDT, they most often put it in Bitcoin. And what’s cool is the fact that this USDT percentage often fluctuates a few hours or days in advance of BTC’s price reacting to it. So monitoring this metric in advance can end up producing a tremendous advantage by catching a sudden fluctuation early enough.”

The road ahead

Although only one month since the Bitcoin halving has passed, things seem to be heating up for Bitcoin as institutional interest soars alongside general derivatives volume. One week after the event, data from crypto data company The TIE showed Bitcoin’s sentiment is the highest that it has been since 2017. 

Several data points hold bullish signs for Bitcoin, but instability and market manipulation are still a major challenge, especially as more serious players continue to join its market. Changes in the way investors and traders are looking at Bitcoin are bound to have a long- to medium-term impact on the price action of BTC as more people decide to hold the asset and acquire stablecoins as a gateway into crypto. A decoupling from traditional markets may also bring new developments to Bitcoin as a new asset class, although this may change as investors decide in which category this digital asset should be placed.