Market Review
This October, the first bitcoin futures ETF was launched while Bitcoin rallied to a new all-time high. Long-term holders are taking modest profits, however, they have slowed their selling during the decline.
Bitcoin has rallied to a new all-time high this week following the launch of the ProShares Bitcoin Strategy ETF (ticker $BITO). The market broke above its previous high in April ($64,717) to reach a new high of $66,928. Since then, the market has undergone a correction, falling to a weekly low of $59,722.
The BITO ETF traded with more than $1.1 billion in assets under management in the first two days after its launch, surpassing the 18-year record set by the $GLD Gold ETF. During this pullback, selling by long-term holders appears to be slowing down as conviction returns.
Bitcoin Futures ETF Finally Gets Approval
Looking at the key messages throughout October, the headline news in the industry was the launch of the BITO ETF product, which utilizes CME futures contracts as the underlying. Open interest in CME contracts exploded in October, increasing by $3.95 billion (265%). This set a new all-time high of $5.44 billion for open interest in CME exchange futures.
Trading volume also reached a new high of $7.66 billion on Oct. 20, the day Bitcoin reached a new all-time high. Traders traded $490 million more on CME futures relative to the previous peak set in February 2021.
And on the same day that prices reached $66,000, funding rates in the perpetual swap futures market reached a new local high. This suggests that many traders established leveraged long positions in the excitement of the coin rally and ETF launch. The market quickly corrected in price during the boom and high leverage, and history repeated itself once again, removing excess leverage, hitting stops, and bringing funding rates back to lower levels. However, it is important to note that funds rates are still at similar levels as they were prior to the deleveraging in early September. The risk of further downward deleveraging of the currency remains as open futures contracts remain near all-time highs.
Finally, on a more constructive note in the derivatives market, the percentage of futures margin collateralized by volatile cryptocurrency assets continues to decline. Futures contracts collateralized by cryptocurrencies have fallen from 70.1% in April (at the time of the Coinbase IPO) to 44.6% today.
The flip side of this observation is that stablecoin or fiat collateral is now placed in 55.4% of open futures contracts (compared to 29.9% in April). The overall state of market leverage is healthier and price volatility in collateral is gradually declining in favor of stable value assets and fiat currencies.
Old Coins Start Moving
Early indications from some older coins are that the more experienced long-term holders (LTH) are selling for profit. This is typical behavior when coin prices reach around new highs, and a week after reaching new highs we can reassess the state of this trend. In the period that has passed this month, the supply of long-term holders has decreased by about 395,000 Bitcoins. The backdrop, however, is that all of this comes after an incredible period of accumulation and hoarding, where the supply of LTH holdings has increased by 2.42 million Bitcoins since the March lows.
The current LTH supply is 680,000 bitcoins higher than this time last year, and even after these weeks of selling, the supply is starting to reverse back up. This observation suggests that the LTH sell-off so far may be more of an “event” than a trend.
We can see that these old coins are moving in the Dormancy Indicator. The dormancy indicator shows the average number of coin days (lifetimes) destroyed per unit of bitcoin sold that day. This can usually be interpreted as follows.
l Higher values mean an older average age and usually indicate that older coins are being sold (typical in a bull market).
l Lower values imply a relatively young average age of Bitcoin, typical of bear markets and accumulation periods.
Based on the 2019–20 data, a pre-bull market dormancy baseline of about 50 days can be established, and this baseline provides a reference point to easily observe the composition of accumulation versus selling. Surprisingly, accumulation from May through September shows an extremely low dormancy value, with the value falling below the 25-day line (a strong accumulation signal) in mid-September. This indicator has risen slightly over the past two weeks but continues to float above and below the pre-bullish 50-day baseline, suggesting that the selling in LTH is relatively mild and not extreme.
Overall, a few long-term holders have started selling their Bitcoins to realize profits, as best reflected by the rising coin-day destruction. However, the rise in dormant and binary coin day destruction values remains fairly small relative to previous bull cycle selling and even STH has stopped selling in this correction. With LTH supply has started to recover, the most likely explanation is that the vast majority of Bitcoin holders are still expecting and waiting for higher prices.
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