- The primary macro highlight last week was the FOMC meeting on December 18, where the Fed delivered an anticipated 25 basis point rate cut - its third consecutive cut since September 2024. However, markets reacted negatively to the hawkish forward guidance.
- Our in-house "Cryptoasset Sentiment Index" continues its decline and signals moderately bearish sentiment, with only 3 out of 15 indicators currently above their short-term trend.
- The Chart of the Week shows persistent Dollar Index appreciation, suggesting potential macro headwinds to Bitcoin given the historical negative correlation between USD strength and crypto markets.
Chart of the Week
Performance
The primary macro highlight last week was the FOMC meeting on December 18, 2024. As anticipated, the Federal Reserve lowered its target rate by 25 basis points, marking the third consecutive rate cut since September 2024. However, traditional financial markets initially reacted negatively due to the hawkish tone of the accompanying forward guidance.
The updated Summary of Economic Projections, commonly known as the "dot plot," revealed an increase in the median projected Fed interest rate for 2025, rising from 3.375% in September to 3.875% in December. This signalled that the Fed expects a higher prevailing interest rate and fewer rate cuts than previously forecasted.
The Fed finds itself in a challenging position as financial conditions have tightened further, even after initiating a rate-cutting cycle in September. In earlier reports, we highlighted the adverse impact of a strong US Dollar on global money supply growth. Historically, Dollar appreciation leads to a contraction in global money supply, which tends to have bearish implications for Bitcoin. This remains a significant macroeconomic risk for Bitcoin as we approach 2025.
For instance, the Dollar Index has been on the rise, and US Treasury yields have continued to climb, even as the Federal Reserve implemented three consecutive rate cuts since September (Chart-of-the-Week).
Despite a sharp fall in Bitcoin from all-time highs of 106,554 USD to 95,208 USD, crypto's strong intrinsic momentum is supported by pro-crypto policy shifts in Washington, rising institutional adoption and ETF flows, Bitcoin purchases by governments and corporations, and major tech breakthroughs in programmable blockchains.
One of the biggest internal momentum drivers and tailwinds for Bitcoin is the growth of staking and DeFi within the Bitcoin ecosystem. This week, BOB (Build on Bitcoin) partnered with Babylon to bring Bitcoin finality to its network. By using Babylon's Bitcoin staking protocol, BOB ensures all transactions on its platform are permanent and irreversible on the Bitcoin blockchain.
Babylon allows Bitcoin holders to "stake" their BTC, similar to a high-yield savings account at a bank, to earn rewards for securing the network. This not only provides another income stream for BTC holders but also extends the current use-cases of the Bitcoin network. Babylon currently has 5,490 mn USD in staked BTC, demonstrating the high demand for such services.
BOB's integration with Babylon is significant because it allows them to tap into this vast liquidity of staked BTC and channel it into various DeFi applications. This is akin to how banks use customer deposits to issue loans and generate yields - except in this case, everything happens on the blockchain in a transparent, permissionless manner. Furthermore, BOB is building additional bridges to enable seamless movement of assets between Bitcoin and other blockchains like Ethereum, unlocking even more possibilities for BTC in other DeFi ecosystems.
We can expect to see a wave of new projects and innovations in the Bitcoin ecosystem, extending far beyond staking. Prominent web3 accelerators like Outlier Ventures, known for incubating successful projects such as zkSync, Aptos, and Celo, have launched dedicated base camps to support the development of next-generation protocols on Bitcoin. These accelerators bring together talented founders, developers, and investors to collaborate on building effective dApps that leverage Bitcoin's unique strengths.
With less than 1% of Bitcoin (BTC) currently being used in dApps, there is a vast untapped market of BTC holders who are essentially underutilizing their assets by simply holding them in wallets. As more projects launch and mature, we expect to see a shift in the way BTC is perceived and used. Rather than being seen solely as a store of value or speculative investment, Bitcoin will increasingly be recognized as a productive asset that can generate real returns through its use in DeFi applications.
This transformation is being driven by recent breakthroughs in composability and scalability, which are enabling developers to build more sophisticated and user-friendly applications on top of Bitcoin. Projects like BOB are at the forefront of this movement, creating seamless bridges between Bitcoin and other blockchains. We confirmation of this trend as Bitcoin DeFi TVL hit all-time highs of 7,477 mn USD earlier last week.
In general, among the top 10 crypto assets, Avalanche, Chainlink, and Dogecoins were the relative underperformers.
Overall altcoin outperformance vis-à-vis Bitcoin sustained its reversal from last week, with Bitcoin depreciating the least among our tracked altcoins on a weekly basis. Ethereum also depreciated more than Bitcoin, continuing its significant underperformance from the prior week.
Sentiment
Our in-house “Cryptoasset Sentiment Index” has recently continued its decline and signals a moderately bearish sentiment.
At the moment, 3 out of 15 indicators are above their short-term trend.
We observe lower sentiment readings in indicators like the crypto dispersion index or the 3-months bitcoin futures basis.
The Crypto Fear & Greed Index signals a “Greed” level of sentiment as of this morning.
/bitwise-core-bitcoin-etp/Performance dispersion among cryptoassets has declined further from last week but remains near the highest readings since March 2024. This signals that altcoins show signs of being less correlated with the performance of Bitcoin.
Altcoin outperformance vis-à-vis Bitcoin has continued its sharp reversal from last week, with Bitcoin depreciating the least among our tracked altcoins on a weekly basis. Ethereum has also continued to 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 altcoin underperformance continues to signal a negative risk appetite at the moment.
Sentiment in traditional financial markets as measured by our in-house measure of Cross Asset Risk Appetite (CARA) has continued its reversal from last week. The index currently signals a neutral cross asset risk appetite.
Fund Flows
Weekly fund flows into global crypto ETPs have continued to be positive but decelerated significantly compared to the prior week.
Global crypto ETPs saw around +237.6 mn USD in weekly net inflows across all types of cryptoassets which is a significant deceleration compared to prior week's net inflows of +3,411.8 mn USD in weekly net inflows.
Global Bitcoin ETPs that saw net inflows totalling +219 mn USD last week, of which +449.3 mn USD in net inflows were related to US spot Bitcoin ETFs alone.
The Bitwise Bitcoin ETF (BITB) in the US saw net outflows, totalling -53.9 mn USD last week.
In Europe, the Bitwise Physical Bitcoin ETP (BTCE) also saw net outflows equivalent to -67.9 mn USD, while the Bitwise Core Bitcoin ETP (BTC1) saw minor net inflows of around +4.9 mn USD.
Outflows from the Grayscale Bitcoin Trust (GBTC) continued to be high, with around -248.2 mn USD in net outflows last week. The iShares Bitcoin Trust (IBIT) continued to see positive net inflows of +1,446.5 mn USD last week.
Meanwhile, flows into global Ethereum ETPs decelerated significantly with around +92.5 mn USD in net inflows, after +1,133.5 mn USD in net inflows the week before.
US Ethereum spot ETFs followed suit, experiencing significant deceleration with around +62.7 mn USD in net inflows on aggregate. The Grayscale Ethereum Trust (ETHE) continued to experience net outflows of around -99.8 mn USD last week.
The Bitwise Ethereum ETF (ETHW) in the US saw minor net outflows of around -12.7 mn USD last week.
In Europe, the Bitwise Physical Ethereum ETP (ZETH) experienced minor net outflows of -2.8 mn USD while the Bitwise Ethereum Staking ETP (ET32) also followed suit with -3.9 mn USD in net outflows.
Altcoin ETPs ex Ethereum while seeing positive minor net inflows with around +15.5 mn USD last week, has significantly decelerated. The Bitwise Physical Solana ETP (ESOL) saw minor net outflows of -0.6 mn USD last week.
Flows into thematic & basket crypto ETPs have reversed back to seeing around -89.4 mn USD in net outflows last week. The Bitwise MSCI Digital Assets Select 20 ETP (DA20) have remained neutral, seeing no net flows last week.
In contrast, global crypto hedge funds continued to exhibit a low market exposure to Bitcoin last week. The 20-days rolling beta of global crypto hedge funds' performance to Bitcoin decreased only slightly to around 0.59 per yesterday's close.
On-Chain Data
In general, Bitcoin on-chain metrics have been somewhat mixed last week, reflecting last week's market correction.
Selling pressure continued to be high as weekly net selling volumes on BTC spot exchanges amounted to -2,180 mn USD last week.
In terms of Spot Cumulative Volume Delta (CVD), which measures the difference between buying and selling volume, the metric remains negative, indicating dominance of sell-side pressure. Dollar order volumes similarly reflect a higher prence of spot sell orders. However, it is worth noting that supply dynamics on exchanges tend to provide a slightly clearer explanation of price action.
On the bright side, Bitcoin net exchange balances continued to decline, with outflows of -20,397 BTC signalling a persistent demand overhang. This sustained supply deficit can be viewed as slightly bullish, as increased exchange inflows would imply a rise in available supply.
Whale activity on exchanges, however, has reversed its trend by turning negative last week as whales send bitcoins to exchanges on a net basis. More specifically, BTC whales have sent +11,518 BTC to exchanges last week, signalling increasing selling interest from whales. Whales are defined as network entities that control at least 1,000 BTC.
In general, the overall supply deficit in Bitcoin has continued to deepen, as evidenced by the ongoing decline in BTC exchange balances. According to the latest data from Glassnode, only 2.7 mn BTC remain on exchanges, marking a decrease of 100K BTC from last week and reaching levels last observed in May 2019. This reinforces our observation that Bitcoin's supply deficit continues to intensify.
Futures, Options & Perpetuals
Last week, BTC futures open interest decreased in BTC-terms and decreased by around -18.1k BTC. BTC perpetual futures open interest also decreased by around -4.5k BTC.
Futures liquidations remained spiked last week, and long liquidations have increased in response to BTC retracing from all-time highs of 106,554 USD to 95,208 USD at time of writing.
Meanwhile, BTC perpetual funding rates, while decreasing from last week, continued to positive bit not overly excessive signalling ongoing moderately bullish sentiment among BTC perpetual traders.
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 now.
The BTC 3-months annualised basis experienced a dip from 16.1% p.a. to 12.5% p.a averaged across various futures exchanges.
BTC option open interest, however, increased somewhat by around +7k BTC. The put-call open interest ratio remained relatively flat.
The 1-month 25-delta skew for BTC continued to rise last week, indicating a modest increase in demand for put options and a less bullish market sentiment. Early in the week, the skew leaned more toward put options, but by the end, it remained slightly skewed toward call options, with delta-equivalent calls carrying a premium of approximately 2.5% per annum.
BTC option implied volatilities also remained relatively stable, with 1-month realized volatility slightly increasing.
At the time of writing, implied volatilities of 1-month ATM Bitcoin options are currently at around 57.6% p.a.
Bottom Line
- Despite the Fed's third consecutive rate cut last week, financial markets reacted negatively to hawkish forward guidance, highlighting ongoing macro headwinds.
- Market sentiment remains subdued with our "Cryptoasset Sentiment Index" signalling moderately bearish conditions, reflecting broader macro concerns.
- Despite the Dollar Index strength signalling macro headwinds, internal momentum builds as new protocols tap into the vast untapped market of BTC holders, with less than 1% of Bitcoin currently used in DeFi applications.
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