September Volatility: Bitcoin Weakness, Ethereum Rotation & Fed Decision

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, cryptoassets underperformed due to elevated selling pressure from short-term holders and rising uncertainty around Bitcoin’s protocol rules.
Our in-house Cryptoasset Sentiment Index has already turned more bearish and short-term holders are increasingly realizing losses.
Chart of the Week: Historically speaking, September has been the worst month for the performance of bitcoin which is also consistent with the weak performance seasonality observed in US equities.

Chart of the Week

Performance

Last week, cryptoassets underperformed due to elevated selling pressure from short-term holders and rising uncertainty around Bitcoin's protocol rules.

Historically speaking, September has been the worst month for the performance of bitcoin which is also consistent with the weak performance seasonality observed in US equities as highlighted here (Chart-of-the-Week).

So, investors shouldn't generally expect significant tailwinds for bitcoin and other cryptoassets in September.

That being said, major macro catalysts remain on the horizon that could induce elevated market volatility in September:

The French prime minister Francois Bayrou has scheduled a crucial vote of confidence for September 8th centred on his austerity-driven budget plan. If he loses – as widely expected – the government could collapse, triggering further political turmoil and possibly even early elections in France. The French finance minister has even warned that France may need an IMF bailout as borrowing costs have spiked in wake of the political turmoil.

This could result in increasing sovereign bond risks across the globe. In this context it is important to mention that Bitcoin may very well serve as “portfolio insurance” against rising sovereign default risks as highlighted here, here, and here.

Another positive catalyst for bitcoin could be the well-anticipated FOMC meeting in September which will take place on the 16th and 17th of September. At the time of writing, Fed Funds Futures price in a 87% probability for at least a 25 basis points cut. We expect rate cuts to be a net tailwind for cryptoassets due to the further steepening of the yield curve and acceleration in US money supply growth. In the meantime, major data releases like the ISM Manufacturing survey (2nd of September) or the non-farm payrolls data release (5th of September) will most likely induce further market volatility ahead of the FOMC meeting.

On the bright side, our own Cryptoasset Sentiment Index has already turned more bearish and short-term holders are increasingly realizing losses which tends to be a necessary condition for a tactical bottom. It is quite likely that a little bit more downside in the short term could already lead to “seller exhaustion” and a subsequent stabilization in prices.

Apart from these macro developments, we are still observing an ongoing investor rotation from BTC to ETH. For instance, last week still saw +$1,332 mn net inflows into global Ethereum ETPs while global Bitcoin ETPs only attracted +$682 mn in capital. Over the past 30 trading days, we have seen that approximately 95% of global ETP flows have accrued to Ethereum only.

One of the reasons for this rotation appears to be the general increase in global risk appetite as seen in our own measure of Cross Asset Risk Appetite (CARA) which generally bodes well for all cryptoassets, in particular altcoins.

Furthermore, ETH purchases by ethereum treasury companies such as Tom Lee's BitMine (BMNR) have also accelerated recently. According to data provided by strategicethreserve.xyz, holdings by BitMine have increased by +187% over the past 30 days alone.

Another key reason for this structural rotation into ETH could be related to increased uncertainty around Bitcoin's protocol rules. More specifically, there is a growing dissent within the Bitcoin community with respect to the dominant node software – Core vs Knots.

This debate really boils down to two visions for Bitcoin's future: Core champions openness - even if it means more on-chain data - on the belief that permissionless innovation is Bitcoin's strength.

Knots prioritizes preserving Bitcoin as a financial network first, offering tools to resist spam and maintain lean, efficient consensus without altering the rules themselves.

Note that there is a trade-off between decentralization due to rising hardware costs and censorship /filtering which could foster decentralization via reduced hardware costs.

At the time of writing, the adoption of Knots protocol rules has been on the rise and currently stands at 18% of all full nodes according to data provided by bitref.com.

In any case, it is worth noting that while the uncertainty around Ethereum's roadmap has decreased since the latest Pectra upgrade in May, the uncertainty around Bitcoin's “roadmap” has increased with the spat between Core and Knots which can partially explain the recent rotation from BTC to ETH.

In general, among the top 10 crypto assets BNB, Solana, and Hyperliquid were the relative outperformers.

Overall altcoin outperformance vis-à-vis bitcoin has declined significantly last week, with only 10% 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 started to reflect the bearish sentiment, insinuating a potential tactical bottom as we see more seller exhaustion take place.

At the moment, only 3 out of 15 indicators are above their short-term trend.

BTC Exchange Inflows and BTC Funding Rates were the only metrics to show very positive movements.

The Crypto Fear & Greed Index has flipped and now signals a “Fear” level of sentiment as of this morning.

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 only around 10% 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 slightly, moving from 0.63 to 0.60.

Fund Flows

Weekly fund flows into global crypto ETPs flipped back positive despite last weeks' bearish sentiment.

Global crypto ETPs saw around +2153.0 mn USD in weekly net inflows across all types of crypto assets, after -1,543.0 mn USD in net outflows the previous week.

Global Bitcoin ETPs have experienced net inflows totalling + 681.6 mn USD last week, of which + 440.7 mn USD in net inflows were related to US spot Bitcoin ETFs.

The Bitwise Bitcoin ETF (BITB) in the US experienced net inflows, totalling +46.2 mn USD last week.

In Europe, the Bitwise Physical Bitcoin ETP (BTCE) experienced minor net outflows equivalent to - 3.4 mn USD, while the Bitwise Core Bitcoin ETP (BTC1) experienced minor net inflows of +1.0 mn USD.

The Grayscale Bitcoin Trust (GBTC) has posted net outflows of - 15.3 mn USD. The iShares Bitcoin Trust (IBIT), experienced net inflows of around + 247.9 mn USD last week.

Meanwhile, flows into global Ethereum ETPs also accelerated last week, reaching the highest level year-to-date with around +1332.4 mn USD in net inflows.

US spot Ethereum ETFs, also recorded net inflows of around +1082 mn USD on aggregate. The Grayscale Ethereum Trust (ETHE), has posted net outflows of -46.9 mn USD.

The Bitwise Ethereum ETF (ETHW) in the US has posted minor net outflows of – 15.3 mn USD.

In Europe, the Bitwise Physical Ethereum ETP (ZETH) saw net inflows of +13.4 mn USD while the Bitwise Ethereum Staking ETP (ET32) saw minor net inflows of +1.1 mn USD.

Altcoin ETPs ex Ethereum also experienced significant net inflows of +135.7 mn USD last week.

Furthermore, thematic & basket crypto ETPs saw minor net inflows of around +3.3 mn USD on aggregate last week. The Bitwise MSCI Digital Assets Select 20 ETP (DA20), followed suit, and saw minor net inflows of +0.1 mn USD last week.

Global crypto hedge funds exposure to Bitcoin has decreased slightly last week. The 20-days rolling beta of global crypto hedge funds' performance to Bitcoin decreased to around 0.58 per yesterday's close, down from 0.61 from the week before.

On-Chain Data

Last week, Bitcoin's on-chain activity improved but still leave room for more upside.

Intraday Spot Buying minus Selling volume continued to be negative but had slightly decelerated last week with net selling volumes at approximately -$1.04 bn on bitcoin spot exchanges.

That being said, Bitcoin whales (entities that hold at least 1k Bitcoin) have reversed their behaviour and have started taking bitcoins of exchanges on a net basis. More specifically, BTC whales removed - 40,315 BTC from exchanges last week. This tends to put an upward pressure on prices.

Furthermore, based on recent data from Glassnode, the overall downward trend in exchange-held Bitcoin reserves has reversed slightly lower. The current level stands at 2.890 mn BTC, representing approximately 14.5% of the total circulating supply, a 4bp decrease 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.

All in all, on-chain metrics have improved but there is still room for further upside. As mentioned earlier, our Cryptoasset Sentiment Index has turned bearish while short-term holders increasingly realize losses - a typical precondition for tactical bottoms. For instance, this can be seen in the Short-term Holder (STH) Spent Output Profit Ratio which has become negative more recently.

Futures, Options & Perpetuals

Last week, BTC futures open interest increased last week by +5.2k BTC across all exchanges and decreased by -734 BTC on CME. Meanwhile, perpetual open interest increased by around +31.6k BTC.

BTC perpetual funding rates continued to remain positive, 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 decreased ~2pp last week to around 6.2% p.a., averaged across various futures exchanges.

BTC option open interest decreased by around 72k BTC while the put-call open interest ratio decreased slightly to 0.63. We observed a slight rise in the put-call volume ratio indicating an increasing appetite for downside protection during this rally, although this has since marginally reversed below that of the beginning of last week.

Meanwhile, the 1-month 25-delta skew for BTC decreased throughout the week by ~2pp to 8.9% signalling increasing appetite for call options, although the bias is still heavily for puts. The presence of a positive skew indicates some preference for downside exposure.

BTC option implied volatilities is flat compared to last week, while the 1-month realized volatility also ticked higher at around 30.9% p.a.

At the time of writing, implied volatilities of 1-month ATM Bitcoin options are currently at around 37.4% p.a. on Deribit.

Bottom Line

Last week, cryptoassets underperformed due to elevated selling pressure from short-term holders and rising uncertainty around Bitcoin’s protocol rules.
Our in-house Cryptoasset Sentiment Index has already turned more bearish and short-term holders are increasingly realizing losses.
Chart of the Week: Historically speaking, September has been the worst month for the performance of bitcoin which is also consistent with the weak performance seasonality observed in US equities.

Appendix

Important information:

This article does not constitute investment advice, nor does it constitute an offer or solicitation to buy financial products. This article is for general informational purposes only, and there is no explicit or implicit assurance or guarantee regarding the fairness, accuracy, completeness, or correctness of this article or the opinions contained therein. It is advised not to rely on the fairness, accuracy, completeness, or correctness of this article or the opinions contained therein. Please note that this article is neither investment advice nor an offer or solicitation to acquire financial products or cryptocurrencies.

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