Exchanges in the spotlight after futures volumes surged ahead of halving
Waiting for bitcoin’s sky to fall
It’s a week after bitcoin’s momentous halving event and the sky has not metaphorically fallen on the crypto world, as some of the more colourful forecasts suggested would happen. Around 7:20 PM London time on Monday 11th May, the rate of bitcoins received as reward for mining was cut by 50% to 6.25 coins per block from 12.5 previously. The event passed without immediate incident. BTC/USD did soar in the weeks leading up to the cut. But it dropped about 19% from 2020 highs above $10,000 to as low as around $8,100, just eight days later. That swing belied some of the more bullish expectations of a rapid market adjustment to the slashed rate of supply.
Even so, over the last few days, BTC has recouped all of its recent loss, bouncing back to as high as $9,966. The supercharged rebound from the global market crash on 12th March (along with other major cryptos) was also glaring for another reason. It was very much like the pre-emptive run-ups seen ahead of the two previous halvings. The normalised chart below shows BTC/USD soared over 100% from the year’s low, erasing the loss from its rout on 12th March. With a 35% rise in the year to date, BTC/USD was also close to regaining 2020 highs at the time of writing.
Normalised chart: BTC/USD – 12/03/2020 to 18/05/2020, 23:21 BST
This spectacular recovery serves to underline the obvious: that the long to medium term outcome for price post-halving is likely to fall somewhere between bullish and bearish extremes. More to the point, if there’s one thing the previous two halvings showed, it’s that the final verdict for prices probably won’t be clear for several months.
In the meantime, the market has longer to muse over one of the most intriguing aspects of the lead-in to halving: a flood of Wall Street cash into cryptos, particularly bitcoin futures. Establishment ’fast-money’ players were obviously anticipating significant moves; the only questions being ‘in which direction?’ and ‘how soon’? Well, there’s no shortage of opinions about what might happen next, though also no guarantees that ‘big money’ will turn out to be ‘smart money’. For one thing, the explosion of the bitcoin derivative market in the four years since the prior halving is one of the key differences between the crypto sphere of 2020 compared to 2016. Players now have tools to work with that they didn’t have in 2016. Potentially better prices in the future can now be locked in in the present to help offset the impact of lower block rewards. Such hedges can avoid the need some market participants (like miners) had before previous halvings to sell bitcoin. Back then, the effect appeared to ‘bring forward’ selling pressure that might otherwise have landed post-halving. This difference alone could mean that bitcoin’s tendency to trend higher in the medium-term after reward cuts won’t be seen this time.
Post-halving highs and hopes
The truth is, of course, nobody really knows whether or not lower block rewards, and consequently, a probable lower rate of supply, will sustainably boost price. 2020’s halving was only the third in bitcoin’s history so it’s impossible to extrapolate from it. Key details from Halvings One and Two, shown in the table below, look fairly inconsequential – apart from that in both cases, prices took flight several months later.
Bitcoin halvings: stats and dates
Sources: Kraken.com, Bitstamp, hackernoon.com
Naturally, the above figures don’t tell the whole story. True, after setting a new top of $994 in early-December 2013, a year after Halving One, BTC/USD went on to an eye-catching peak of $1,100 later that month, 100 times higher than before the reward cut. After that though, BTC slumped to $220 and remained stuck below $1,000 for years. And those moves were quite tame compared with the surge that followed Halving Number Two in the summer of 2016. Prices topped at $20,000 in late-2017 followed by a notorious nosedive to $3,200 a year later. As such, it’s fair to say that protracted volatility is one of the few clear takeaways from halvings past. Another is that any new price peaks may not last. Likewise, bitcoin notched a few daily moves of more than 10% in days ahead of Halving #3, showing the kind of parabolic momentum often seen before a subsequent derailment.
Volume data has been far less ambiguous than price trends this time around, with a significant volume rise among key exchanges in 2020’s first quarter. Venues vetted by research outfit The Block saw turnover accelerate 61% quarter-on-quarter to $154bn. That came off the back of bitcoin’s biggest ever one-day volume surge of $75.9bn, according to CryptoCompare. Unsurprisingly, that influx occurred on one of BTC’s most volatile days ever, Friday 13th March, when BTC/USD plummeted 30% in step with global market turmoil. April volumes were also elevated, with $66.2bn traded on the last day of the month, the second-highest daily turnover recorded.
Still, there was more to the volume boom than met the eye: derivatives trading was even more striking. Futures turnover across the crypto asset class rocketed 314% to $2 trillion versus 2019’s four-quarter average, according to TokenInsight’s Q1 2020 exchange report. Given that bitcoin futures accounted for 78% of Q1 contract turnover, the outcome of those flows will eventually hinge on how the halving pans out. CME’s open interest data confirmed that institutional moves made up the lion’s share of activity. Contract value bounded 43% to $407m, or 8,399 contracts, around a week before halving, compared to the same period in 2019.
As uncertainty about the crypto world abounds, the definitive growth of bitcoin futures is one certainty that can be grasped. For sure, deepening Wall Street interest may not be universally welcome among investors committed to bitcoin’s guiding economic and social ethos. Besides, there’s no way of knowing whether institutional interest will even last. On balance though, for the crypto asset class to mature, and indeed for the cultural shift towards blockchain technologies to accelerate, markets underpinning them must mature too.
With the wider world looking just as topsy-turvy as has been the norm in crypto for years, rising institutional interest— if sustained—will stand BTC in good stead in years to come. In the shorter run, deepening demand for bitcoin futures from the more ‘conservative side’ of the street should be a boon for the best-run exchanges. It goes without saying that institutions will run a mile from exchanges suspected of reporting fake volume, after as much as 95% of BTC volume traded last year was deemed to be fake, according to Bitwise Asset Management. Even among bona fide venues, those with the most transparent and comprehensive price methodologies and highest standards of governance, will come out on top. Such qualities tend to go hand in hand with the kind of solid reputation exchanges need in order to be deemed credible by the institutional establishment.
Ken Odeluga, 19-05-2020