State of Crypto Market Structure powered by Velo Data

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The last month has been explosive for Bitcoin and the broader crypto market, with Bitcoin and Ethereum both up over 20%.

What's been driving this price action?

While it's hard to derive exactly why digital assets have been performance so strongly, we can assume this may be due to a combination of ETF speculation and speculation around a turning point in the liquidity cycle. Looking at cumulative returns by geographic trading sessions for both Bitcoin and Ethereum, we can see a clear divergence, with EU trading hours lagging strongly behind US and APAC trading sessions.

Bitcoin cumulative return by session (US, EU, APAC)

Ethereum cumulative return by session (US, EU, APAC)

Looking at the derivatives market, we can see that Bitcoin's annualized 3 month futures basis, representing the delta between and the 3 month futures contract for Bitcoin, is now trading north of 10%; a continuation of a year-long move up. This shows that there is strong demand to be long Bitcoin in the futures market. In addition, the 3 month futures basis now trades at a premium to 3 month US treasuries, a phenomenon that we described in a previous report titled: "Liquidity Feedback Loop". In short, the market is now putting a risk premium on Bitcoin's "risk free yield", which can be harvested by longing spot and shorting the futures contract.

Shifting away from crypto native venues and looking at the CME, which is predominantly trading on by traditional financial players, we can see that the annualized basis on CME has also continued its uptrend, now at over 18%.

Open interest on CME for Bitcoin has also continued to rise, a trend which began two months back, and has now breached $4.5 billion. However, there is an interesting trend that may be forming comparing CME activity to that of Ethereum.

The futures basis for Ethereum on CME is now trading at a 5% premium to that of Bitcoin, now over 20%. In addition, we can see that open interest for ETH on the CME has now started to rise, after lagging the initial move up from Bitcoin. It may be too early to definitely say, but it appears "tradfi" may be beginning to rotate into the ETH ETF trade after two months.

On a similar note, the Grayscale discount continues to close, now below 10% for the first time since July of 2021. This reflects increased demand for Bitcoin exposure as well as speculation on the likelihood of Bitcoin ETF approval and the conversion of GBTC's trust structure into an ETF.

We can see a similar trend in Grayscale's ETHE product, with its discount to NAV now resting below 15%.

In the options market we can see that implied volatility has continued drifting lower amidst the slow grind up for both Bitcoin and Ethereum, although we've seen a slight pop on 1 week and 1 month vols during this sharp move upwards in price action over the last few days. Sitting below 60%, volatility may be attractive for an asset that trades up to 80% vol that appears to finally be waking up.

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Disclaimer: This research report is exactly that — a research report. It is not intended to serve as financial advice, nor should you blindly assume that any of the information is accurate without confirming through your own research. Bitcoin, cryptocurrencies, and other digital assets are incredibly risky and nothing in this report should be considered an endorsement to buy or sell any asset. Never invest more than you are willing to lose and understand the risk that you are taking. Do your own research. All information in this report is for educational purposes only and should not be the basis for any investment decisions that you make.

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