This week we dive into the increasing risk appetite developing in crypto. We cover analytics from different parts of the space, which suggest interest in crypto is climbing again and speculation renewing. While macro conditions this time around remain different from 2019, traders keep bringing up the possibility of an “echo bubble” emerging.
Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether.
- Bitcoin fees reached their highest since the FTX-led crash
- Ethereum fees declined after rising for four consecutive weeks
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges. Crypto going into exchanges may signal selling pressure, while withdrawals potentially point to accumulation under regular circumstances
- Nearly $100M worth of Bitcoin left CEXs this week, with over $400M being withdrawn in the past two weeks
- Ether, on the other hand, recorded inflows of $262M this week and $667M over the past two weeks, with this contrast between the two assets potentially contributing to Bitcoin’s outperformance
3 Signs of Crypto Forming an “Echo Bubble”
With crypto prices heading for their best month in over a year, people are getting optimistic about the bear market being behind us. Moreover, many have begun comparing the recent rise with the one recorded in the second quarter of 2019. Back then, Bitcoin bounced back from $3k all the way to $13k within four months, echoing the bull run experienced two years earlier.
This time around, Bitcoin is up approximately 50% from its bottom and expectations of a similar echo bubble forming are building up. Here are three reasons to believe why that could be the case.
Stablecoins resurge — After declining for 10 months straight, the aggregate market cap of USDT, USDC and DAI recorded a monthly increase
- Most exchanges denominate trading pairs in stablecoin terms, and thus the total amount of stablecoins has a direct impact on the liquidity available within the crypto space
- Over the past few years, we have seen the market cap of stablecoins lag prices, for instance continuing to climb in Q1 2022 while the market had peaked
- This time, their market cap appears to have to bottomed a week after the FTX crash and began slowly increasing, pointing to demand to enter crypto restarting
- If this trend continues, which it very well could given its lagging relationship to prices, it would validate the positive expectations that have been brewing
In derivatives markets, we also see positive outlooks arising.
Futures prices back in contango — The price of futures contracts has climbed back above those from spot markets after dipping below them in November and December
- Futures prices for Bitcoin have historically been in contango the vast majority of time
- Periods of backwardation, where futures prices are below spot, have previously marked bottoms in March 2020 and May 2021
- Now both futures and perpetual swaps are showing a bullish bias on the market, as prices are back in contango and funding rates become slightly positive (0.01%)
- At the same time, funding rates are still far from the 0.06% levels recorded in February or November of 2021 when traders were paying 80%+ annualized to long Bitcoin
- Current levels in derivatives suggest the market is optimistic, but at the same time not yet overheated, which could create grounds for the ongoing rally to persist.
Newer parts of the market are also picking up, suggesting an increase in risk tolerance.
Bluechip NFTs outperform ETH — Notable NFT collections are having a terrific month, increasing both in dollar ETH terms
- Even with Ether increasing by 31% in January, eight out of the top ten NFT collections managed to outpace it
- With most of these still having limited or no utility, rising NFT prices suggest speculative demand returning to crypto
- NFT volumes have also climbed by 60% from their lows in October 2022, though they remain 90% down from a year ago
- Many lower cap crypto-assets have seen similar trajectories in their prices over the past month as animal spirits return to crypto
Overall, these indicators suggest risk appetite in crypto is on its way back, potentially on track for another echo bubble like the one recorded in 2019. That being said, it does not mean crypto will become “up only” from here.
Buyer beware — major crypto-assets proceeded to lose at least half of their value following the 2019 echo bubble
- While returns so far since November are still a fraction of those recorded in 2019, crypto is at a much larger scale making it unlikely we reach the same magnitude
- Based on the ratio of returns in 2017 relative to returns in 2021, Avi Felman, Head of Digital Assets Trading at GoldenTree, tweeted that an echo bubble could lead to $27k Bitcoin and $2.3k Ether
- Even though signs of resilience in the economy persist while inflation trends lower, the Fed remains insistent on continuing quantitative tightening, casting doubts on whether such rally can take place while liquidity drops
- Moreover, increases in financial assets like crypto typically lead to a wealth effect where people tend to spend more, which would cause inflation to worsen, making it very unlikely for new highs to be reached for at least one or two more years
As discussed in last week’s newsletter, on-chain metrics align with bottoming patterns from previous cycles. Now key metrics point to the development of an echo bubble a là 2019 forming. Will crypto find its moment to shine again? Or will macro issues carry on dragging the industry down?
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