Institutional Top of Mind #18

In this first inaugural edition of our Institutional Top of Mind with 10x Research, we delve into the critical role of flows and liquidity in the crypto market, highlighting recent trends in stablecoin volumes and Bitcoin futures activity.

TL; DR

• Flows and liquidity are critical in the crypto market. Increased trading activity boosts liquidity and key indicators like stablecoin turnover and Bitcoin futures activity.
• Stablecoin volumes surged to $140 billion by mid-March 2024 but now average $40 billion daily, indicating lower trading activity. It's important to note that stablecoin minting, a significant factor that influences crypto prices, peaked before dropping post-Bitcoin halving.
• Bitcoin demand fluctuated due to ETF-related events and inflation concerns, with notable declines and rebounds linked to perpetual futures and ETF approval expectations. Monitoring these flow indicators helps predict market momentum, with current consolidation due to slowed flows and liquidity.

Flows and liquidity are crucial in the crypto world. Higher trading activity leads to increased liquidity across various volume and turnover indicators. Key metrics like daily stablecoin turnover and activity in Bitcoin spot and perpetual futures help gauge the market's health. During the "DeFi Summer," Total Value Locked (TVL) was significant but became less pivotal as DeFi's role diminished among crypto traders.

Despite a brief lull during Christmas and early January, stablecoin volumes have risen, particularly in anticipation of the Bitcoin Spot ETF launch. Daily stablecoin volumes surged from $20 billion to $140 billion by mid-March 2024. These volumes have settled at $40 billion daily, indicating muted trading activity. Rising stablecoin activity typically correlates with higher crypto prices and vice versa. Stablecoin minting, a key fiat onramp into crypto, also influences prices; increased minting activity often signals rising crypto prices.

Exhibit 1: Bitcoin (blue, LHS) vs. Bitcoin Turnover Volumes (white, RHS, $ billions)

Crypto market trading volumes surged from $40 billion in early January 2024 to $160 billion, peaking amid unexpected inflation increases. Since then, volumes have declined to a seven-day average of $50 billion, indicating muted market sentiment.

From October 2023 to mid-March 2024, 30-day rolling stablecoin minting increased from $1 billion to $10.5 billion but dropped to near zero after the Bitcoin halving on April 20, indicating a quieter trading environment. In January, Bitcoin demand saw a "sell-the-news" phase when Grayscale GBTC outflows overwhelmed buy orders from other ETF issuers. By early March 2024, the ETF accumulated $12 billion but paused mid-month due to rising inflation concerns. Flows rose again in mid-May as inflation fears eased, yet ETF flows have remained subdued.

Unlike perpetual futures flows, which rose with Bitcoin ETFs and stablecoin minting until mid-March, the unwinding of open interest positions led to Bitcoin's early May decline. Anticipation of Ethereum Spot ETF approval by the SEC on May 20 increased perpetual futures open interest, pushing Bitcoin back near all-time highs in June. However, uncertainty from Ethereum ETF issuers and the SEC caused Ether prices and open interest to decline in June, impacting our flow indicator and, subsequently, Bitcoin prices.

Exhibit 2: Bitcoin (blue, LHS) vs. Money Flow Indicator (white, RHS, $ billions)

Monitoring flows and liquidity offers straightforward insights into the crypto market. Momentum driven by these factors is a crucial driver of both upward and downward crypto prices. Notably, stablecoin minting halted around the Bitcoin halving date. From January 1 to April 20, Bitcoin miners generated approximately $6.5 billion, while stablecoin growth increased by $25 billion. Early-year demand for fiat-to-crypto conversion was strong, but traders opted to wait post-halving before deploying more fiat into crypto.

Bitcoin's recent consolidation can be attributed to slowed flows and liquidity. Keeping an eye on these variables can give investors an edge in identifying positive momentum shifts. Not all flow indicators need to turn positive, but the robust ones must do so to lift Bitcoin prices.

In conclusion, flows and liquidity are fundamental to understanding the crypto market's dynamics. Increased trading activity boosts liquidity, with key indicators like stablecoin turnover and Bitcoin futures activity serving as vital gauges of market health. Despite fluctuations in trading volumes, particularly around events such as the Bitcoin Spot ETF launch and the Bitcoin halving, the overall trends in stablecoin volumes and minting activities provide crucial insights.

These metrics highlight the relationship between fiat onramps and crypto prices, emphasizing the importance of stablecoin activity. Monitoring these variables, especially during significant market events, offers investors valuable foresight into potential price movements. Although the market has seen periods of slowed flows and liquidity, identifying robust flow indicators can provide a strategic advantage in anticipating positive momentum shifts and capitalizing on emerging opportunities.

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