BTC surged to $65,000 on August 23rd, alongside a broader rally in risk assets following comments from US Federal Reserve Chair Jerome Powell at Jackson Hole, which hinted at potential rate cuts. This announcement led to a decline in the US dollar and boosted the equity markets, with the S&P 500 approaching its all-time high. Bitcoin, which had been lagging behind equities, saw a sharp 6.06 percent increase in one day, marking its second-largest daily move since May.
The rally occurred amidst a backdrop of increasing positive correlation between Bitcoin and US equities. Until now, Bitcoin has shown relative weakness compared to equities since hitting its early August low. Friday’s price surge also saw a sharp increase in correlation, which we believe indicates a return of risk appetite to the market.
Added to this are the significant short liquidations seen on August 23rd, with $40 million in BTC perpetual futures liquidations and $140 million across all pairs. This comes as there has been a substantial drop in open interest, suggesting reduced leverage in the market. As interest in delta-neutral and funding arbitrage trades rises, the directional open interest in the market has decreased, potentially allowing more room for price appreciation in Bitcoin and altcoins. The current funding rates, significantly lower than earlier this year, also indicate a shift in market dynamics, highlighting a more cautious approach among leveraged traders despite the overall bullish sentiment.
The market bullishness has been fuelled by recent developments in the US economy which have led to a significant shift in monetary policy expectations, labour market dynamics, and business activity, underscoring the evolving challenges faced by the Federal Reserve and broader economic conditions.In a highly anticipated speech at the Kansas City Fed symposium in Jackson Hole, Federal Reserve Chairman Jerome Powell indicated a forthcoming adjustment in monetary policy, signalling the potential for interest rate cuts. The labour market data has contributed significantly to this change in stance, with data showing that the US labour market added fewer jobs than initially reported over the past year. This downward revision, combined with weaker-than-expected payroll data for July, has raised alarms about the health of the labour market. The unemployment rate reached a post-pandemic high of 4.3 percent, which has triggered worries that the Federal Reserve may have delayed too long in reducing interest rates. However, more recent data, including weekly jobless claims, suggest that the labour market is undergoing a more controlled slowdown.
Meanwhile the noose continues to tighten on bad actors in the crypto markets. In a first, China successfully won extradition from Thailand of an individual named Zhang, who is accused of orchestrating a $14 billion cryptocurrency pyramid scheme. His extradition marks the first financial crime suspect handed over under the China-Thailand agreement reached in 2019, and highlights the increasing international cooperation to combat cryptocurrency-related crimes.
On a more positive note in the industry, Franklin Templeton has made strides in expanding its on-chain money market fund (FOBXX) by integrating it into the Avalanche network. This move allows investors to purchase tokenised shares, further solidifying the fund’s position in the blockchain space. Already established on Stellar and Polygon, the fund primarily invests in low-risk US government securities and aims to leverage Avalanche’s technology for continued growth.In another significant development, BlackRock’s iShares Ethereum Trust (ETHA) has emerged as a leader in the Ethereum ETF space, becoming the first Ethereum ETF to surpass $1 billion in net inflows. This achievement is particularly noteworthy given that Ethereum ETFs have generally seen lower inflows compared to their Bitcoin counterparts. In contrast, Grayscale’s ETHE has faced significant outflows since its conversion to a public product, underscoring the competitive landscape within Ethereum investment vehicles.
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