The meteoric climb of Bitcoin (BTC) all the way to $5,500 came to a crashing halt yesterday, at least that’s what social media and the “moon boys” will tell you. However, profit taking at this stage is actually a healthy development for the market that is so heavily driven by leverage and speculative flow. The underlying blockchain metrics do not necessarily indicate whether the rally should or should not have taken place; the hash rate has been on a very steady but gradual uptrend, while the total number of unique addresses used on the Bitcoin blockchain is showing little growth. In fact, one can argue that the fundamentals point to much lower valuation. However, as with anything speculative, do not underestimate the power of FOMO. Also, given the growth in the derivatives market, being aware of the flow in both the options and futures markets is becoming increasingly important in judging the short-term direction of the market.

Ethereum September futures spot rate – Coin360

Source: Deribit

The chart above illustrates sharp pull back in the Ethereum contango spread. While fundamentally, there is little reason for the spread to have widened all the way to $14 to begin with, this extension proved very supportive for BTC and the crypto market in general. The pull back took place just under the $200 level (Sep. contract topped out at $199.30 on Deribit) and speculative nature of the cryptocurrency market suggests that we will retest the level first before another pull back.

The release of the upcoming CME Commitment of Traders report deserves your close scrutiny, especially after the Asset Manager/Institutional category saw a sharp increase in longs to 315 vs 35, while shorts are now at 89 vs 241. Holding is at record high for longs and, while the size may be trivial compared to more traditional alternative investment products, it serves as a confirmation that professional money managers are very much aware of the fast-growing asset class.

Looking elsewhere, users of Decentralized Autonomous Organization (DAO) MakerDAO (MKR) look set to raise the stability fee for Maker’s DAI (DAI) stablecoin by a further 4%, in the fifth such vote this year. However, the move, which will mean the fee rising to 11.5%, has had very limited impact on the demand for leverage and the total amount of Ethereum (ETH) locked in the credit ecosystem has remained stable around 2.08%.

Finally, Cryptocurrency hedge fund Polychain Capital saw its assets under management (AUM) shrink from $1 billion to $591.5 million in Q4 2018. However, the WSJ’s sources attributed the steep decline to a drop in the value of the fund’s holdings amid a protracted crypto bear market, "rather than redemptions by investors."

Thank you for reading,
The BeQuant’s Analytics team

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