Investment Institutions Increase Crypto Investments
The crypto market has recently experienced a notable surge, marking its highest point since June. This uptrend can be attributed to several key factors, including the sustained anticipation of elevated inflation in various countries, heightened concerns about “stagflation,” and the Securities and Exchange Commission (SEC) expressing no objections to Bitcoin futures ETFs.
The SEC’s lack of objection to Bitcoin futures ETFs signifies the official opening of the world’s largest capital market to cryptocurrencies, effectively eliminating the most significant regulatory obstacles in the short term. This development paves the way for mainstream institutions to confidently enter the crypto market.In response to the temporary rise in the US debt ceiling, an increased appetite for market risk, and institutional approval, both US debt and the US dollar have experienced a decline. Despite several central banks announcing plans to accelerate interest rate hikes, persistent inflationary pressures indicate that market liquidity is anticipated to remain elevated for an extended period.
Table of Contents
The Bull Market Is Still Continuing
Following a brief downturn, the cryptocurrency market has entered a dynamic phase this week. As of 4:00 UTC on October 15, the overall market value has surged to $2.45 trillion, nearing its historical peak of $2.54 trillion. In terms of volatility, the disparity in market volatility has continued to widen this week. Notably, implied volatility surpasses realized volatility, signaling stability in the current bullish market stage with no discernible indications of a downturn.
Examining market skewness, there has been an uptick in short-term expectations, while medium and long-term projections have remained relatively stable compared to the previous week. A significant factor contributing to this trend is the notable shift of numerous professional investors towards a bullish stance since the onset of August. This collective change in sentiment has played a crucial role in shaping the current market expectations across different timeframes.
Analyzing the futures term structure, there is a clear bullish sentiment in the derivatives market, evident in the overall increase in futures premiums, reaching a new high since May. However, a contrasting trend is observed in the declining premiums of forward futures term structures on major futures exchanges. This decline suggests that while investors maintain optimism, they are hesitant to pay higher premiums for future contracts, likely influenced by concerns about the potential risks associated with monetary policy tightening and macro liquidity contraction.
Anti-Inflationary Demand: the Source of the Bull Market
The remarkable performance of the crypto market this week is closely tied to shifts in the macro-economic environment.
On October 13, the United States released the September Consumer Price Index (CPI), revealing an inflation rate of 5.4%, surpassing market expectations and significantly exceeding the Federal Reserve’s 2% target. Conversely, the non-agricultural index, a gauge of economic growth, reached a new low. The sustained period of high inflation, lasting for over six months, has eroded investor confidence in the Federal Reserve’s ability to effectively address inflation. With economic growth below expectations, it suggests that the liquidity-driven stimulus to the economy has not yielded the desired effects. In response, institutional investors are turning to stocks, commodities, and cryptocurrencies as hedges against inflation risks.
Furthermore, several macroeconomic indicators indicate an escalating risk of “stagflation.” Faced with excess liquidity, developed economies like South Korea and New Zealand have responded by raising interest rates. The UK has also hinted at the possibility of earlier interest rate hikes, potentially before December. The divergence between the US Institute for Supply Management’s (ISM) manufacturing production index and the price index, along with the US 10-year Treasury yield exceeding 1.61% on October 11, despite an increase in real yields, may substantiate the looming threat of stagflation. OPEC’s gradual production growth poses a serious inflation threat and could adversely impact oil demand.
The Federal Reserve grapples with concerns about inflation risks and sluggish economic growth. Despite these challenges, the Fed maintains a firm stance on interest rates and anticipates earlier debt reduction during a period of soaring prices and stagnant output, signaling the potential onset of stagflation. In this environment, the demand for inflation-resistant assets, such as Bitcoin, has witnessed a surge.
Simultaneously, the SEC’s approval of Bitcoin futures ETFs and the easing of crypto transactions in countries like Russia and India underscore the official acceptance of crypto investments by major capital markets amid improving compliance standards. Consequently, highly regulated institutional investors, including pension funds, are contemplating participation in crypto-related transactions.
It is foreseeable that the persistent high inflation environment, coupled with extensive involvement of institutions from major capital markets in crypto-related activities, may lead to a substantial continuation of the crypto market’s positive performance until the year-end. However, while liquidity risks may not significantly impact the market in the short term, the medium and long-term outlook remains susceptible to the risk of liquidity contraction due to the general steadfastness of central banks in monetary policies, posing a significant threat to the future performance of the crypto market.
