Bitcoin Surge Passes $40K as ETF Approvals Near Deadline

By Ang Kok Wee, Head of Treasury

Past Week’s Performance Dashboard

  • Crypto continues to surge. Bitcoin rallied to a high of USD 44,400, while Ethereum saw a high of USD 2,305. Bitcoin dominance pushes towards 55% (from 42% at the beginning of the year).
  • The US dollar regained some ground against the major currencies. The DXY, otherwise known as the US Dollar Index, rebounded from 102.5 to 104.0.
  • Gold made history with an all-time high of USD 2,145/oz but has since given back gains.
  • US Treasury yields continue to fall with benign macro-economic data as market participants price in 1.25% rate cuts next year.

FOMC Looms

With the touted Fed pivot narrative being the driving force across asset markets in recent months, US bonds have rallied considerably since, with the US 10-year Treasury yield declining to 4.19%, from recent highs of 5%.

Risk assets enjoyed a remarkable surge in November, propelled by dovish signals from Fed officials and encouraging economic data, including robust Q3 GDP growth and steady core PCE inflation figures.

Now it appears the Fed pivot narrative has temporarily run its course, equities were mostly sideways in the past week. Markets are anticipating Fed Funds rate to remain at 5.25% in the upcoming FOMC. We closely watch the main event for cues going forward: Fed Chair Powell’s speech and the release of Summary of Economic Projections, which will provide vital updated quarterly economic forecasts.

There is a possibility that bond markets have been overly aggressive in anticipating rate cuts over the next year (Fed fund futures are priced at 125 basis point cuts).

Nevertheless, if macroeconomic data continues to meet expectations and the Fed refrains from hawkish rhetoric, such Goldilocks-type market conditions will prevail, and the seasonal rally will continue into the closing weeks of December.

Potential Market Catalyst This Week

Economic Data:

Dec 8 (Friday) 2130 hrs

  • US Non-Farm Payroll (NFP) (fc +180k) – The overall trend line has been pointing to a cooling job market, and the latest expectations are no exception. If the number comes within expectations, it will reinforce the broad consensus that the tight labour market is easing, which is construed as a continuing reduction in inflation (Fig. 1).
Fig 1 US Non Farm Payroll Source Forexfactorycom

 Dec 12 (Tuesday) 2130 hrs

  • US Consumer Price Index (CPI) (fc. 3.2% YoY) – Taking into account the PCE Index, a key inflation indicator, which met expectations last week and continues to be on a downward trend, it suggests that the CPI will also behave similary. Although the YoY inflation rate of 3.2% remains above the Fed’s long-term target of 2%, Governor Waller’s suggestion that the Fed will focus on inflationary trends rather than absolute levels should help support risk assets if the CPI print is within expectations (Fig. 2).
Fig 2 US CPI Inflation YoY Source Forexfactorycom

BITCOIN

Digital Gold Rush

Bitcoin surged past the USD 40,000 threshold on Monday, reaching a high of USD 44,400 briefly this morning. This marked a 15% increase over the previous week.

It appears that cryptocurrencies have completely decoupled from other risk assets, driven in large part, by the anticipation of a Bitcoin Spot ETF approval.

Bitcoin has witnessed eight consecutive weeks of unabated demand since late October. In the past 24 hours alone, almost USD 80 million worth of leveraged shorts were liquidated. Bitcoin’s price action suggests that momentum will continue through December as we creep closer to the ETF approval window.

According to Bloomberg, there is a 90% chance of at least one, if not all applicants, to be given the nod between Jan 5 -10, 2024. If approved, it may just as well be a coincidence to mark the 15-year anniversary of Bitcoin’s launch by Satoshi Nakamoto (Jan 8, 2009).

Naturally the stakes in a binary outcome from the decision of the US Securities and Exchange Commission (SEC) have never been higher.

A delay in the SEC’s decision would certainly trigger a violent retracement. On the other hand, approval could lead to a temporary sell-off due to the “buy the rumour, sell the fact” phenomenon. This belief is supported by the recent increase in Bitcoin futures positions held by asset managers on regulated exchanges like CME (Fig. 3).

These asset managers will most likely convert their futures exposure into actual Bitcoin upon approval, potentially dampening demand-driven price appreciation from the ETFs.

Fig 3 Open Interest Long CME Bitcoin Futures Source CFTC COT

However, we maintain that the convergence of positive catalysts, as discussed last week, will ultimately determine Bitcoin’s value. Keeping in mind its longer cyclical price patterns, we remain optimistic about its medium-term outlook (Fig. 4).

Fig4 Technical Levels for Bitcoin

Where Does This Leave Ethereum?

Bitcoin’s impressive rally has lifted other cryptocurrencies as well. Ethereum, the second-largest cryptocurrency with a market capitalization of USD 275 billion, has surged over 11% in the past week, briefly touching a high of USD 2,305 earlier today.

To put it in perspective however, Bitcoin has risen 166% this year alone, while Ethereum has advanced only 92%.

Bitcoin has recovered more than half of its peak-to-trough decline but Ethereum has retraced much less. If it were to retrace a similar magnitude as Bitcoin, that would put Ethereum at USD 2,850 (Fig. 5).

Fig 5 Technical Levels for Ethereum

As such, Bitcoin dominance has risen. While the correlation between Bitcoin and Ethereum has historically been strong, it has been at its weakest since mid-2021 (Fig. 6).

Fig 6 60 Day Correlation Between Bitcoin and Ethereum Source Coin Metrics

The market’s attention has been primarily focused on the Bitcoin Spot ETF. Once the focus shifts towards the Ethereum Spot ETF, which is still in its early stages, it could provide a strong tailwind for Ethereum to catch up to Bitcoin. This aligns with the relatively undervalued position of Ethereum compared to Bitcoin from a technical analysis perspective (Fig. 7).

Fig 7 ETH BTC Rate Source TradingView

This has undoubtedly caught the attention of some market participants.

In the derivative markets, there has been high demand for bullish structures. Notable ones include 2,400 calls for 26 January 2024 and 2,600 calls for 29 March 2024.

Actual volatility for Ethereum has also increased noticeably, averaging 3.1% daily over the past month, surpassing its daily average of 2.4% in the past year.

This in turn provides support for implied volatilities to remain elevated. The revival of Ethereum volatility marks a shift in the dynamic, with Ethereum implied volatility now trading at a higher premium over Bitcoin (Figs. 8 and 9).

Fig 8 Bitcoin Implied Volatility Across Various Tenures
Fig 9 Ethereum Implied Volatility Across Various Tenures

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