The recent “uptober” crypto rally has garnered significant attention, with flagship cryptocurrency BTC surging over 35% since October while assets like LINK and SOL have seen even more remarkable growth.
However, beneath the surface, the underlying liquidity trends play a crucial role in shaping this price action. Understanding these trends is vital for assessing the current market cycle and gleaning insights into the future trajectory of the market.
This post is part of Consensus Magazine’s Trading Week, presented by CME.
As highlighted in a previous CoinDesk publication, price movements with low trading volumes tend to be less reliable indicators compared to those accompanied by higher volumes. Low volumes signify limited market participation at a specific price level, potentially leading to increased price volatility and reduced market depth. Conversely, higher trading volumes indicate broader market participation, reflecting a stronger consensus and providing a more dependable basis for price movements, thereby enhancing the credibility of the signal.
The resurgence in trade volumes for BTC and ETH, two critical liquidity metrics, is particularly noteworthy. Several of the highest trading volume days since the market’s peak two years ago occurred during the recent rally. BTC Spot volumes, which had been at three-year lows until September, have undergone a significant recovery and are now approaching six-month highs.
However, this is just scratching the surface. A deeper exploration of liquidity trends can provide us with more profound insights.
Strong Action in Derivatives, Especially CME
The futures open interest (OI) in BTC and ETH has recently surpassed the $20 billion mark, a significant milestone since the FTX meltdown in November 2022. This surge is primarily driven by institutional capital, with the CME gaining the most market share across all platforms and inching closer to overtaking Binance as the leading BTC futures exchange by OI.
A similar trend is observed in options, with open interest in BTC options surpassing $16 billion and volumes reaching all-time highs. A significant portion of this derivatives market activity translates to spot prices, with the influx of derivatives contributing to increased inherent leverage in the system, consequently elevating the risk of forced liquidations exacerbating price movements.
Spot Order Books Tightened, Revealing a Relative Lack of Sellers
The depth of the order book has tightened over the past few months, despite substantial price increases. This tightening, combined with a trend of the sell side of the order book shrinking more than the buy side, suggests a relative scarcity of sellers compared to buyers.
Busy Derivatives Dynamics Meet a Tight Spot Market
The annualized realized volatility for BTC and ETH, despite a recent uptick, remains relatively low compared to the previous bull market in 2020 and 2021. While increased volatility typically drives higher trading activity, the current spot volumes adjusted by volatility for BTC are already in the top quartile of the 2020/2021 bull market cycle.
This Rally Feels Different
The heightened interest from traditional institutional investors, coupled with a market that exhibits a scarcity of sellers amidst increasing yet relatively low volatility, indicates a potential shift in the market’s dynamics towards a new phase.
Looking ahead, while the possibility of interim corrections cannot be dismissed and the macro environment remains uncertain, this rally could signify the commencement of the next bull market.
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