Bitcoin Outshines Stocks as Fed Cut Bets Rise — Is Crypto Entering a ‘Bad News = Good News’ Regime? | Bitwise

André Dragosch, PhD Director, Head of Research — Europe

Max Shannon Senior Research Associate

Ayush Tripathi Research Analyst

André Dragosch, PhD Director, Head of Research — Europe

Max Shannon Senior Research Associate

Ayush Tripathi Research Analyst

Overview

Chart of the Week
Performance
Sentiment
Fund Flows
On-Chain
Futures, Options & Perpetuals
Bottom Line
Appendix

Last week, bitcoin outperformed US equities although cryptoasset performances were relatively mixed due to reversal in relative ETH/BTC fund flows.
Our in-house Cryptoasset Sentiment Index has turned slightly more bullish and signals a neutral market sentiment again.
Chart of the Week: Bitcoin and other cryptoassets reacted positively on these bad US non-farm payrolls release as it increased Fed rate cut odds for September even further. In fact, bitcoin appears to be entering a market regime where “bad news = good news” as the correlation to economic surprises is becoming increasingly inverse.

Chart of the Week

Performance

Last week, bitcoin outperformed US equities although cryptoasset performances were relatively mixed due to reversal in relative ETH/BTC fund flows.

A key catalyst last week was the release of the US employment data for August on Friday. US non-farm payrolls only grew by +22k jobs – lower than in July and significantly lower than Bloomberg consensus expectations of +73k. What is even worse is that the June jobs numbers have been revised lower once again to show a loss of -13k - the first monthly negative NFP print since December 2020. The U3 unemployment rate also ticked higher to 4.3%, reinforcing the view that US labour market conditions continue to deteriorate.

Bitcoin and other cryptoassets reacted positively on these bad employment news as it increased Fed rate cut odds for September even further. In fact, bitcoin appears to be entering a market regime where “bad news = good news” as the correlation to economic surprises is becoming increasingly inverse (Chart-of-the-Week).

At the time of writing, Fed Funds Futures are pricing a 100% probability for a 25 bps reduction of the Fed Funds Target Rate in September. In fact, the market has even started to price in the possibility of a 50 bps cut (11% probability).

As outlined in our latest monthly Bitcoin Macro Investor report, there is a notable interaction between lagging indicators like employment and leading indicators like the US yield curve.

Note that a further deterioration of US employment conditions (which we expect) will lead to higher Fed rate cut odds, a steepening of the yield curve and higher liquidity growth which is bullish for bitcoin and other cryptoassets.

In Europe, French Prime Minister François Bayrou is confronting a pivotal confidence vote on September 8th over his austerity budget. A defeat- seen as highly likely - could topple the government, fuel political turmoil, and pave the way for snap elections.

French borrowing costs are already surging, with the finance ministry cautioning that an IMF rescue might become unavoidable. These mounting risks underscore Bitcoin's appeal as a form of “portfolio insurance” against escalating sovereign default concerns, as we noted in a recent Espresso.

In any case, these developments could continue to keep “macro volatility” elevated over the coming weeks. That being said, it is quite likely that increasing sovereign risks in France could continue to lead to higher long-term bond yields and steepening yield curves across the globe which would also fuel additional liquidity growth.

Another interesting development was a reversal in relative ETP flows last week: For the first time in 8 weeks, global Bitcoin ETP flows were larger than Ethereum ETP flows again. So, there are some signs of a “re-rotation” of capital from Ether back to bitcoin. This was also reflected in last week's relative performance between bitcoin and Ether.

In general, among the top 10 crypto assets Dogecoin, Hyperliquid, and XRP were the relative outperformers.

Overall altcoin outperformance vis-à-vis bitcoin continued to be low last week, with only 30% of our tracked altcoins managing to outperform bitcoin on a weekly basis. Ethereum also underperformed bitcoin last week.

Sentiment

Our in-house “Cryptoasset Sentiment Index” has marginally improved from a slightly bearish reading to neutral.

At the moment, 7 out of 15 indicators are above their short-term trend.

Last week, Bitcoin Exchange Inflows and the BTC Funding rate showed positive momentum.

The Crypto Fear & Greed Index currently signals a “Neutral” level of sentiment as of this morning. This comes from an improvement from last week, where the index spent the majority of the time in “Fear” territory.

Performance dispersion among cryptoassets remained low and stable last week, signalling that altcoins have continued to be highly correlated with the performance of bitcoin.

Altcoin outperformance vis-à-vis Bitcoin has decreased from last week, with around 30% of our tracked altcoins managing to outperform Bitcoin on a weekly basis. Ethereum also managed to underperform Bitcoin last week.

In general, increasing (decreasing) altcoin outperformance tends to be a sign of increasing (decreasing) risk appetite within cryptoasset markets and the latest altcoin outperformance signals a increasing risk appetite at the moment.

Sentiment in traditional financial markets as measured by our in-house measure of Cross Asset Risk Appetite (CARA) has also decreased, moving from 0.60 to 0.47.

Fund Flows

Weekly fund flows into global crypto ETPs had flipped negative last week, despite posting strong inflows from the week prior to last. This could likely be a result of macro volatility, paired with a neutral market sentiment and a “re-rotation” of capital away from Ether back to Bitcoin.

Global crypto ETPs saw around -448.1 mn USD in weekly net outflows across all types of cryptoassets, after +2,153.0 mn USD in net inflows the previous week.

Global Bitcoin ETPs have continued to experience net inflows totalling +444.3 USD last week, of which +246.4mn USD in net inflows were related to US spot Bitcoin ETFs.

The Bitwise Bitcoin ETF (BITB) in the US experienced net outflows, totalling -76.9 mn USD last week.

In Europe, the Bitwise Physical Bitcoin ETP (BTCE) experienced net inflows equivalent to +9.0 mn USD, while the Bitwise Core Bitcoin ETP (BTC1) experienced minor net inflows of +0.8 mn USD.

The Grayscale Bitcoin Trust (GBTC) has posted net outflows of -69.7mn USD. The iShares Bitcoin Trust (IBIT), however, experienced net inflows of around +434.3 mn USD last week.

Meanwhile, flows into global Ethereum ETPs also flipped negative last week, with around -908.4 mn USD in net outflows.

Note that this was the first reversal in weekly relative ETH/BTC flows in 8 weeks.

US spot Ethereum ETFs, also recorded net outflows of around -787.7mn USD on aggregate. The Grayscale Ethereum Trust (ETHE), has posted net outflows of -83.5 mn USD.

The Bitwise Ethereum ETF (ETHW) in the US has posted also net outflows of -49.1 mn USD.

In Europe, the Bitwise Physical Ethereum ETP (ZETH) saw minor net inflows of +0.8 mn USD while the Bitwise Ethereum Staking ETP (ET32) saw minor net inflows of +0.1 mn USD.

Altcoin ETPs ex Ethereum also experienced minor net inflows of +12.1 mn USD last week underscoring a relatively low risk appetite for altcoins (which can be explained by the decrease in our CARA reading for last week).

Thematic & basket crypto ETPs also followed suit and posted minor net inflows of +4.0 mn USD on aggregate last week. The Bitwise MSCI Digital Assets Select 20 ETP (DA20) had experienced minor net inflows of +4.0 mn USD on aggregate.

Global crypto hedge funds exposure to Bitcoin has decreased last week. The 20-days rolling beta of global crypto hedge funds' performance to Bitcoin decreased to around 0.66 per yesterday's close, down from 0.71 from the week before.

On-Chain Data

Last week, Bitcoin's on-chain activity remains relatively subdued given the current macro backdrop, as analysed in our performance section.

Intraday Spot Buying minus Selling volume continued to be negative but had slightly decelerated last week with net selling volumes at approximately -$0.45 bn on bitcoin spot exchanges.

That being said, bitcoin whales (entities that hold atleast 1k Bitcoin) have continued to remove bitcoins off exchanges on a net basis, for the second consecutive week. This is indicating an increase in whale HODLing, i.e. hoarding behaviour by large investors. Whales are defined as network entities that hold at least 1,000 BTC.

More specifically, BTC whales removed –2,689 BTC from exchanges last week which tends to put upward pressure on prices.

Furthermore, based on recent data from Glassnode, the overall downward trend in exchange-held Bitcoin reserves has reversed slightly higher. The current level stands at 2.989 million BTC, representing approximately 15.0% of the total circulating supply, a 50 bps increase from last week.

It's worth noting that the 30-day measure of “apparent demand” for Bitcoin remained positive and continued to reaccelerate over the past week. This is signalling a renewed influx of short-term holders (read “retail investors”) as well.

Furthermore, when examining “older coins” (i.e. bitcoins that have not transacted for at least 5-6 months), we observe a continuation of the downward trend that began in late June of this year. Since BTC supply older than 6 months is considerably less likely to be spent on any given day, this declining trend typically occurs during bullish market conditions as profit-taking combines with wealth transfers from long-term holders to newer market participants and speculators.

All in all, on-chain metrics have remained subdued but the ongoing decline in BTC supply older than 6 months could insinuate growing volume of active supply, which is often indicative of an elevation of on-chain economic activity.

Futures, Options & Perpetuals

Last week, BTC futures open interest increased by +0.4K BTC across all exchanges, and increased by +3.7k BTC on CME. Meanwhile, perpetual open interest increased by around +26k BTC.

BTC perpetual funding rates continued to remain positive and upward trending last week indicating a bullish sentiment among traders in the perpetual futures market and a long bias.

In general, when the funding rate is positive (negative), long (short) positions periodically pay short (long) positions, which is indicative of bullish (bearish) sentiment.

The BTC 3-months annualised basis increased significantly last week to around 7.2% p.a., averaged across various futures exchanges.

BTC option open interest increased by around +27 BTC while the put-call open interest ratio increased slightly to 0.65. We observed some significant spikes in the put-call volume ratio indicating an increasing appetite for downside protection during this rally.

Meanwhile, the 1-month 25-delta skew for BTC increased from +9.3% to +10.8% signalling increasing appetite for put options. The presence of a positive skew indicates some preference for downside risk aversion and downside hedging activity.

BTC option implied volatilities decreased slightly compared to last week, while the 1-month realized volatility ticked higher at around 31.1% p.a.

At the time of writing, implied volatilities of 1-month ATM Bitcoin options are currently at around 36.5% p.a. on Deribit.

Bottom Line

Last week, bitcoin outperformed US equities although cryptoasset performances were relatively mixed due to reversal in relative ETH/BTC fund flows.
Our in-house Cryptoasset Sentiment Index has turned slightly more bullish and signals a neutral market sentiment again.
Chart of the Week: Bitcoin and other cryptoassets reacted positively on these bad US non-farm payrolls release as it increased Fed rate cut odds for September even further. In fact, bitcoin appears to be entering a market regime where “bad news = good news” as the correlation to economic surprises is becoming increasingly inverse.

Appendix

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