Asset Prices Fell Back, Recent Volatility Increased TokenInsight Weekly Market Review 2024

• This week witnessed a retreat in the prices of mainstream cryptocurrencies, influenced by the distinct anticipation of the Federal Reserve’s debt reduction and the consequential downward impact of the US dollar shock.
• Despite remaining relatively low, volatility in the market has started to exhibit an upward trend.
• Traditional institutions are displaying a growing interest in crypto futures and exchange-traded funds (ETFs), indicating an expanding institutional involvement in the crypto market.
• While the influence of regulatory authorities on the crypto market has diminished, the forthcoming adjustments in regulatory policies in specific countries, along with shifts in fiscal and monetary policies in major nations, are poised to exert a substantial impact in the near future.

New Uncertainty Is Being Priced

Macro factors continue to wield significant influence over the crypto market this week. In terms of volatility, mainstream cryptocurrencies have shown a gradual uptick in historical volatility since reaching a low point on Monday, albeit within a relatively narrow range. Professional investors maintain stable expectations for Bitcoin, whereas market expectations for Ethereum have notably decreased. The recent stabilization of Ethereum price fluctuations appears to be a key contributing factor to this shift in sentiment.

A noteworthy development is the increasing volatility in mainstream cryptocurrencies over the weekend. The commencement of the Jackson Hole Global Central Bank Summit suggests that central banks’ concerted efforts in liquidity control will profoundly impact investor expectations in the crypto market, subsequently influencing cryptocurrency prices.

Evaluating the futures premium term structure, the recent surge in market volatility and investor apprehension regarding the uncertainty of liquidity reduction have led to a noteworthy decline in futures premiums for the upcoming week and month. Particularly, front-month futures on the CME Exchange exhibited a pronounced negative premium on Friday. Concurrently, the futures premium for the current quarter on major exchanges has markedly contracted.

While investors maintain optimism for the market’s future, the forward futures premium expiring on June 24 of the following year on the Deribit Exchange, known for its annual futures, has experienced a moderate decline. Additionally, the forward skewness of mainstream cryptocurrencies has reduced due to macroeconomic factors. Derivatives markets are currently adjusting to integrate new uncertainties into pricing structures.

Regulatory Impact Is Limited, and the Influence of Derivatives and Macro Factors May be Further Enhanced

This week, many major countries have made some moves in supervision, but most of them have shown their attitudes and their actual influence is far less than that of the second quarter.

• Regulators in the UK, China, and other nations issued fresh crypto transaction risk warnings, yet market impact remains limited.
• SEC Chairman Gensler seeks input on whether financial firms’ digital customer interaction innovations should adhere to existing rules or necessitate new ones.
• Indian crypto firms propose the IFSCA in Gujarat as the regulator for all transactions, fearing a draft bill may classify cryptocurrencies as commodities, subjecting them to local KYC compliance.
• Small countries, like El Salvador, proceed with positive crypto regulations. Cuba plans central bank rules for cryptocurrencies, emphasizing legal compliance for service providers.

An important development is Iran’s decision to lift the ban on cryptocurrency mining on September 22. Initially imposed due to electricity concerns in the summer, the temporary ban is expected to be lifted, potentially accelerating the recovery of computing power across the network. Given the significant correlation between computing power and asset prices, this move by Iran is seen as a notable positive for the market.

This week has seen increased activity from traditional financial institutions in the cryptocurrency markets.

• PayPal (PYPL. O) is extending its cryptocurrency service to the UK, marking its first expansion outside the United States since October 2020.
• Traditional financial data service providers are contemplating integrating crypto market data into their offerings. MSCI’s CEO recently mentioned the company’s exploration of cryptocurrency-related products.
• As Wall Street deepens its involvement in cryptocurrencies, Citigroup is exploring the possibility of offering bitcoin futures trading to its significant customer base, pending regulatory approval.
• Analysts Eric Balchunas and James Seyffart view the rapid withdrawal of proposals for Ethereum futures ETFs by VanEck and ProShares as a positive signal for potential bitcoin futures ETFs. The SEC may approve multiple bitcoin futures ETFs simultaneously, potentially launching as early as October, to prevent a first-mover advantage.

Traditional institutions, including ETFs and banks, are increasingly adopting futures purchases as a common method to enter the cryptocurrency market for investment. The influx of substantial funds is likely to amplify the influence of the derivatives market on the spot market and asset prices. Consequently, the effectiveness of factors related to derivatives in predicting market movements may experience further enhancement.

The influence of macroeconomic factors on both the US dollar and cryptocurrency markets has witnessed a significant escalation.

• Weak performance in U.S. PMI and initial jobless claims data contrasted with slightly improved second-quarter GDP figures, causing fluctuations in the crypto market due to their impact on the U.S. dollar.
• Liquidity risks are escalating as Kansas Fed Chairman George advocates for quicker tapering, citing a “strong case” to commence this year due to robust economic recovery and rising inflation. Bullard supports a plan to scale back bond purchases, asserting minimal Delta virus-related risks. He suggests the Fed initiate tapering bond purchases in Q1 2022, followed by balance sheet reduction.
• The Jackson Hole annual summit of global central banks on August 27-28 is anticipated to significantly influence the crypto market. With the theme “Macroeconomic Policy in an Unbalanced Economy,” Federal Reserve Chairman Powell’s speech is expected to provide hints about the reduction of bond purchases. Powell’s guidance during the meeting and a clear path for subsequent reductions may boost the US dollar’s strength. Given the strong correlation between the crypto market and the US dollar, positive crypto performance is expected in the near and medium term. However, continuous observation is necessary to gauge the further impact of liquidity contraction on the crypto market.