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📈 Weekly market review

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Market Review

Bitcoin continues its uptrend, having briefly surpassed the $100,000 mark on Thursday morning. However, the breakout failed, causing a sharp drop to $91,000 by the evening. As of now, Bitcoin is trading just below $100,000 at $98,948.

The moving averages (MA) in Figure 1 are:

• 7-Day MA: $97,106

• 30-Day MA: $91,958

• 180-Day MA: $67,670

• 360-Day MA: $62,481

• 200-Week MA: $41,815

Moving averages, particularly the 7-day and 30-day MAs, often serve as key support levels during bull markets. When price approaches these MAs, they typically act as local nadirs before resuming upward movement. This week provided a clear example of this, with the 30-day MA acting as support during the liquidation cascade from $100,000.

The current price structure is extremely bullish. Bitcoin will remain in price discovery until one of the following levels is breached: $92,000, $90,000, $88,000, $74,000, $72,000, $70,000, or $68,000.

The breakout and subsequent failed breakout this week were driven by short covering and long liquidations, respectively, resulting in sharp price fluctuations. Bitcoin had been constrained by large sell orders at the psychologically significant $100,000 level, but these orders have now been cleared. This sets the stage for a potential breakout, which could happen soon given Bitcoin's current price.

The Bitcoin returns are as follows:

• 1 month: 28.54%

• 3 months: 76.5%

• 6 months: 39.55%

• 12 months: 124.64%

Bitcoin's annual return currently stands at 124.64%, but it is beginning to decline as we move into December, with prices from December 2023 rolling off the trailing 1-year return. Since 2015, Bitcoin's average annual return has been around 56%, meaning the current trailing 1-year return remains significantly above average. This return will stay elevated until February 2024, assuming there is no further rally in the meantime.

Periods of above-average returns are typically followed by below-average returns, and vice versa. Bitcoin experienced a gradual downtrend from the launch of the BTC ETF in Q1 2024 until Donald Trump's reelection on November 5th. As the 1-year return becomes indexed to a higher starting price, the current above-average return should not be seen as a signal of a market top.

BTC ETF Flows

Net BTC ETF inflows since last Friday were $1.066 billion.

Inflows have recovered strongly from last week despite the intraday volatility of the last 2 days. Net inflows in the previous five weeks were $2.5, $2.67, $1.37, $0.66, $0.035 billion, respectively. Average daily flows this week were $217.18 million.

Volatility

Bitcoin's implied volatility (DVOL) is currently at 58.7%. DVOL is currently in the 69.5th percentile relative to levels seen in the last year.

DVOL contracted after the failed breakout at the $100,000 level. Market makers’ positions typically benefit from moving back to the center of a long-term range since their short option positions will move farther out of the money. This is why it collapsed after reaching a high of 64% Thursday morning.

Basis Spread

The basis spread, or the price of a futures contract over its spot price, is positive across all maturities. The average spread of all maturities is about 16% over the last week, up from 14.5% the week prior. The failed breakout at $100,000 doesn’t seem to have phased the market’s enthusiasm as spreads continue to widen.

The futures curve is in an inverted contango from the week (December 13th) onward. The basis falls continuously from the front week to September 2025’s maturity in a smooth curve. There is about an 11% difference between the lowest and highest yielding maturities. The future’s curve has steepened in the last week as the spread between maturities has expanded from a recent low of 5% last week.

A steep downward sloping contango indicates that demand for closer maturities is outstripping supply and becoming detached from Bitcoin’s long run APR. The more detached close maturities become the more bullish the market is on near term price action.

Bullish Bitcoin futures curves are typically special inverted contangos where the front month has the highest APR, and APR falls every maturity thereafter, but APR remains positive along the whole curve. This week’s futures is a perfect example.

This is the most bullish curve in the short term because market makers use the front month to hedge short perp and spot positions during periods of high demand.

Funding Rates

Like the basis spread and volatility, funding rates provide insight into how traders are positioned in the market. Yesterday, funding rates surged dramatically as Bitcoin surpassed $100,000. Traders and market makers scrambled to cover short positions, causing funding rates to spike to several hundred percent. Once all short sellers had either been liquidated or stopped out, funding rates normalized. Later in the day, traders who had bought during the rally attempted to sell their long positions but found no buyers, causing funding rates to plummet. Typically, an explosive rise in funding rates signals a local top, while a sharp decline suggests a local bottom.

Macro

Donald Trump won the 2024 presidential election on a platform that included establishing a “Bitcoin reserve” for the U.S. federal government. His administration is expected to prioritize the "Boosting Innovation, Technology and Competitiveness through Optimized Investment Nationwide" (BITCOIN) Act, introduced earlier this year by Wyoming Senator Cynthia Lummis. While the bill has yet to pass Congress, its advancement is anticipated under the incoming administration, supported by substantial crypto industry lobbying. Donations from high-net-worth individuals and companies like Coinbase totaled hundreds of millions of dollars this cycle, surpassing the oil and gas industry's lobbying efforts over the last three cycles combined.

Meanwhile, monetary policy developments have also made headlines. At the Federal Open Market Committee (FOMC) meeting on November 7, the Federal Reserve cut short-term interest rates by 25 basis points (bp), aligning with market expectations, which had priced in an 85% chance of such a move. Fed Chair Jerome Powell provided little additional guidance in the post-meeting press conference, carefully avoiding questions about the recent election or potential Trump policies. This cut follows a more significant 50 bp reduction in September, a move seen as an acknowledgment by Powell of the need to accelerate the rate-cutting cycle. Rapid rate cuts typically signal deflationary pressures, though recent strength in asset prices suggests a more complex economic landscape.

Other central banks are echoing the Fed’s pivot to easing monetary policy. In China, a stimulus package introduced on September 24 took effect on October 7, featuring a policy-rate cut, mortgage-rate reductions, and 800 billion yuan ($114 billion) in stock market support. Additionally, reports suggest the Chinese government is considering issuing 6 trillion yuan in central government bonds to fund consumer handouts, local-government refinancing, and bank recapitalizations.

Market volatility has responded accordingly. Implied volatility in equities (VIX) is at a five-month low of 12.83, while U.S. Treasury implied volatility recently hit a monthly low of 91.47 and may soon break its uptrend. Both equity and bond market volatilities peaked before the election but have since collapsed, as expected, with sidelined market makers resuming liquidity provision post-election. This normalization has further stabilized financial markets, underscoring the interplay between fiscal, monetary, and market dynamics in this new political era.

Sincerely,
The Hermetica Team