- Last week, cryptoassets underperformed traditional assets due to an escalation of geopolitical tensions in the Middle East and a general risk-off environment across most assets.
- Our in-house “Cryptoasset Sentiment Index” has reversed from high levels and currently signals neutral sentiment again. It had increased to the highest level since March 2024 before the most recent sentiment reset.
- Geopolitical tensions in the Middle East have abated for now and other market drivers appear have taken over. One of the key drivers for the most recent recovery since the beginning of last week has been the relative increase in Trump’s election odds.
Chart of the Week
Performance
Last week, cryptoassets underperformed traditional assets due to an escalation of geopolitical tensions in the Middle East and a general risk-off environment across most assets.
Iran fired around 200 ballistic missiles on Israel on late Tuesday after the Israel Defense Forces had started ground operations in Southern Lebanon.
As we have outlined in one of our recent Crypto Market Espresso reports, these geopolitical risk events tend to be very short-term in nature and Bitcoin has generally performed relatively positive following major geopolitical risk events in the past. Therefore, sell-offs in cryptoassets related to an increase in geopolitical risks should generally be regarded as tactical buying opportunities.
On the bright side, the most recent sell-off has led to a “healthy” reset in crypto market sentiment to more neutral levels which had reached the highest level since March 2024 going into this sell-off according to our own Cryptoasset Sentiment Index as highlighted here.
The geopolitical tensions in the Middle East have abated for now and other market drivers appear have taken over. One of the key drivers for the most recent recovery since the beginning of last week has been the relative increase in Trump's election odds (Chart-of-the-Week). This was supported by the most recent campaign rally in Butler (PA), where Elon Musk publicly endorsed Donald Trump as future president.
At the time of writing, although Trump leads on Polymarket by around 3%-points, Harris generally leads on average by approximately 1%-point across multiple betting sites.
We will publish a special Crypto Market Espresso over the coming days about the potential effects of the US election on cryptoasset markets.
On the macro side, the most recent positive US jobs report has blown out expectations and have eased market concerns for an imminent US recession. More specifically, non-farm payrolls increased by +254k (+150k expected) in September after +159k (revised up) in August.
The unemployment rate declined from 4.2% to 4.1% which even “untriggered” the prominent Sahm recession rule again.
Interestingly, rates markets have even priced in a higher probability of a hard landing since a robust jobs market and reacceleration in inflation might ease pressure on the Fed to deliver more decisive rate cuts. In fact, Treasury yields have risen significantly following the release of the employment report on Friday, reflecting higher rate expectations.
In this context it is worth highlighting that the spread between the General Collateral Repo Rate and the effective Fed Funds Rate has increased to the highest level since early 2019. This is signalling ongoing liquidity stress in the US banking system and highlights the need for additional easing by the Fed.
Furthermore, as outlined in our latest monthly report , leading indicators for the US unemployment rate such as the Conference Board jobs differential still point to a continued increase over the coming months. Hence, it still remains to be seen whether the latest acceleration in payroll growth signals a trend reversal or just a temporary increase in employment growth.
However, it is worth reiterating that a potential US recession would probably be not so relevant for the performance of Bitcoin and other cryptoassets anymore.
In fact, our quantitative analyses show that other factors such as the US Dollar, monetary policy and coin-specific factors have become more important for the performance of Bitcoin over the past 6 months, and growth concerns have become less relevant.
Meanwhile, the Chinese stimulus continued to provide a major tailwind to the Chinese stock market last week. The Hang Seng Index had its best 3-week performance in around 50 years highlighting the significance of the latest stimulus efforts by the PBoC and the Chinese government.
In general, we still expect Bitcoin and other cryptoassets to catch up to this very positive monetary policy stimulus and that these global easing measures by the Fed, PBoC and other central banks are barely reflected in current prices.
In general, among the top 10 crypto assets, TRON, Bitcoin, and BNB were the relative outperformers.
Overall, altcoin outperformance vis-à-vis Bitcoin has declined again compared to last week with only around 15% 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 reversed from high levels and currently signals neutral sentiment again. It had increased to the highest level since March 2024 before the most recent sentiment reset.
At the moment, 10 out of 15 indicators are above their short-term trend.
Last week, there were significant increases to the upside in BTC long futures liquidations dominance and BTC exchange flows.
The Crypto Fear & Greed Index currently signals a “Neutral” level of sentiment as of this morning.
Performance dispersion among cryptoassets continued to increase last week, albeit from very low levels. This signals that altcoins are still very much correlated with the performance of Bitcoin.
Altcoin outperformance vis-à-vis Bitcoin declined compared to last week, with only around 15% of our tracked altcoins managing to outperform Bitcoin on a weekly basis. Ethereum also underperformed 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 decline in altcoin outperformance could signal a decrease in risk appetite at the moment.
Meanwhile, sentiment in traditional financial markets as measured by our in-house measure of Cross Asset Risk Appetite (CARA) also continued to increase significantly despite the recent geopolitical escalation and currently signals a bullish sentiment in traditional financial markets. The 3-month change in Cross Asset Risk Appetite has now increased to the highest level since 4 years.
Fund Flows
Fund flows into global crypto ETPs have reversed significantly to the downside following the latest geopolitical tensions.
Global crypto ETPs saw around -186 mn USD in net outflows across all types of cryptoassets which is a significant reversal compared to prior week's +1,222.2 mn USD in net inflows.
GlobalBitcoinETPs saw net outflows totalling -188.2 mn USD last week, of which -301.5 mn USD in net outflows were related to US spot Bitcoin ETFs alone.
Hong Kong spot Bitcoin ETFs also saw negative net outflows of -58.1 mn USD last week.
The ETC Group Physical Bitcoin ETP (BTCE) also experienced net outflows equivalent to -7.5 mn USD, while the ETC Group Core Bitcoin ETP (BTC1) experienced slightly positive net inflows (+0.5 mn USD).
Outflows from the Grayscale Bitcoin Trust (GBTC) accelerated, with around -47.1 mn USD last week. iShares Bitcoin Trust (IBIT) continued to see positive net inflows of +135.2 mn USD.
Meanwhile, globalEthereumETPs saw a renewed negative reversal in ETP flows with around -31.2 mn USD in net outflows.
US Ethereum spot ETFs saw around -30.7 mn USD in net outflows in aggregate. Continuing net outflows from the Grayscale Ethereum Trust (ETHE) which totalled around -67 mn USD last week were once again the major reason behind aggregate net outflows.
The ETC Group Physical Ethereum ETP (ZETH) also saw a reversal in flows with -9.5 mn USD in net outflows while the ETC Group Ethereum Staking ETP (ET32) still managed to attract capital of around +2.6 mn USD in net inflows.
However, net inflows into Altcoin ETPs ex Ethereum even accelerated somewhat with around +7.7 mn USD last week.
Besides, flows into Thematic & basket crypto ETPs continued unabated with net inflows of around +25.7 mn USD last week. The ETC Group MSCI Digital Assets Select 20 ETP (DA20) experienced neither net in-/ nor outflows last week (+/- 0 mn USD).
Meanwhile, global crypto hedge funds reduced their exposure to Bitcoin into the latest sell-off last week. The 20-days rolling beta of global crypto hedge funds' performance to Bitcoin declined to around 0.78 per yesterday's close, after 0.85 the week before.
On-Chain Data
In general, Bitcoin on-chain metrics worsened somewhat due to the rise in geopolitical tensions last week.
Bitcoin spot intraday net buying volumes on exchanges turned negative last week with around -295 mn USD over the past 7 days, after around +165 mn USD the week before. This is also consistent with the underperformance in Bitcoin and other cryptoassets over the past 7 days.
Bitcoin whales also distributed bitcoins last week. More specifically, BTC whales have transferred 8,922 BTC to exchanges last week on a net basis. Transfers to exchanges are generally indicative of increasing selling pressure. Whales are defined as network entities that control at least 1,000 BTC.
However, in this context its worth pointing out that the overall number of BTC whales is still hovering year-to-date highs.
Overall BTC on-exchange balances also increased slightly according to Glassnode data.
During the latest sell-off early this week, we saw the highest amount of BTC exchange transfers in loss by short-term holders since the bottom in August. In other words, there were increasing signals for a renewed capitulation of the short-term holder cohort.
Meanwhile, the Long-Term Holder cohort is primarily engaged in a regime of dominant HODLing and accumulation. By many metrics, the typical Bitcoin investor is doing better and making more money than they were a few weeks ago, and they are also generally feeling less stressed out financially which limits any further significant distribution in the short term.
Futures, Options & Perpetuals
Last week, derivatives traders have largely maintained their exposure to both BTC futures and perpetuals.
More specifically, BTC futures open interest declined by around -7k BTC while perpetual open interest increased by +2k BTC.
Meanwhile, BTC perpetual funding rates remained relatively positive despite the recent sell-off. This implies that the market still continues to exhibit a long bias at the moment.
When the funding rate is positive (negative), long (short) positions periodically pay short (long) positions. A positive funding rate tends to be a sign of bullish sentiment in perpetual futures markets.
However, the BTC 3-months annualised basis only decreased slightly is currently around 7.9% p.a.
Besides, BTC option open interest increased significantly last week after the large quarter-end expiries. Meanwhile, the put-call open interest ratio was mostly unchanged, which implies that option traders both increased their put and call positions concordantly.
However, the 1-month 25-delta skews for BTC drifted slightly up last week, signalling an increase in the relative demand for put options. The 1-month skew is now more or less neutral.
BTC option implied volatilities moved higher due to the increase in geopolitical uncertainty. At the time of writing, implied volatilities of 1-month ATM Bitcoin options are currently at around 54.6% p.a.
Bottom Line
- Last week, cryptoassets underperformed traditional assets due to an escalation of geopolitical tensions in the Middle East and a general risk-off environment across most assets.
- Our in-house “Cryptoasset Sentiment Index” has reversed from high levels and currently signals neutral sentiment again. It had increased to the highest level since March 2024 before the most recent sentiment reset.
- Geopolitical tensions in the Middle East have abated for now and other market drivers appear have taken over. One of the key drivers for the most recent recovery since the beginning of last week has been the relative increase in Trump’s election odds.
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