Cryptocurrency Market Update: Analysis and Insights - January 03, 2024

Bitcoin ETF approval driving markets this week

Regarding Bitcoin specifically, we are still waiting for the SEC decision over the approval of the Bitcoin ETF. The decision should be imminent: meaning there could be an announcement by the end of the week.

Meanwhile, the Bitcoin price was above 45,000 for the first time since April 2022. It almost reached 45,900 us dollars yesterday according to coinmarketcap. The move has certainly been favoured by the excitement around a potential ETF approval. There is still a low probability for the SEC to delay the answer, requesting more time to do the paperwork, or even reject it, according to a Matrixport report published today.

Issuers, including Blackrock, VanEck, Bitwise, Invesco and Ark Invest, have been posting updates recently to their initial filing, amending details, specifying for instance how they would satisfy the ETF liquidity requirements: how market-making would be performed to ensure that market participants can trade in the secondary market. And they all had until December 29th to make their last amendments. You can see here the filings from Ark 21 Shares. The last update was filed on December 28th.

If the SEC approves the Bitcoin ETF, it would likely notify all issuers that they can issue their ETF the following week in order to support fair competition: there are currently 13 Bitcoin ETF applications. All of them should be available on the SEC website, but it’s easy to pull a few with a simple research.

Large pension funds, insurers, endowments would finally be able to invest in a suitable vehicle: an ETF of their choice, that perfectly tracks Bitcoin.

Increasing Volatility

Markets were quite volatile near the end of the year which could be quite unusual for a holiday season. The main explanation is of course the excitement around the potential ETF approval. Another explanation could come from the option markets.

On the 29th of December, we had nearly 8 billion dollars of option contracts expiring on Bitcoin, and 3.5 billion on Ether. A large expiration like this one has consequences on spot price - the largest option traders might be competing for the best outcome, trying to hedge or roll their positions at the best price.

According to Coinglass, considering the 5 top exchanges for Bitcoin options: zooming on this graph, we can actually see that the Open interest dropped from 21 billion US dollars to 12.75 billion. But actually, something we don’t see on this graph: the total open interest of all options expiring on the 29th was close to 14 billion a week earlier. What it means is that traders have been rolling their positions from the December to the January expiry or later expiries. In other words, option traders have renewed their position: probably in line with their bullish sentiment, or to cover an upside risk.

As traders have been rolling and buying call options, the implied volatility has naturally been moving up. Looking at the Bitcoin 7-days implied volatility, it is already above 70%. Basically ATM implied volatility is approximately proportional to the corresponding ATM option price. So if an option price increases, its implied volatility increases and vice versa. So a higher implied volatility is simply an indicator for higher options demand, driving the price of these options up. And this indicator reached its highest level since March. Based on the options market, the sentiment clearly favours the upside, and we mentioned in previous sessions that market participants are likely targeting levels above 50,000 us dollars by the end of this month.

Rising Volumes and Exchanges Outflow

Traded volumes were also on the rise before the 29th of December, DEX volumes reached on the 22nd their highest level since March according to DefiLlama. Almost 7 billion US dollars were traded that day, with Uniswap and Pancakeswap getting the Lion share.

DEX volumes still represent 10 to 15% of the total spot trade volume. So we should look into Centralised exchanges volumes as well.

If we look at centralised exchanges, we had in December 1.1 trillion dollars exchanged on spot markets, and it is the first time since September 2022 that trading volumes exceed the 1 trillion dollars threshold.

The Ethereum Ecosystem Outlook for 2024

Markets are very optimistic for several reasons. 2023 was the year when institutions came back in the market pushing Bitcoin and Ether prices first, followed by the impressive recovery of Solana.

The price of SOL was multiplied by 5 over the last quarter. All the crises that shook the crypto markets in general, in 2022 and 2023, are almost forgotten as we enter 2024. Of course there is never any certainty, but we have at least as many reasons to be optimistic today as we had before the two previous rallies in 2017 and 2021 for the market, and for both Bitcoin and Ether.

Regarding Ether in particular, if Bitcoin ETFs are approved, the next natural ETF candidate could be Ether, even though the approval challenge is different because Ethereum is a PoS blockchain.

But still, we have different events to look forward to. The eagerly awaited ‘sharding’ upgrades on Ether are expected this year. Starting with the ‘proto-danksharding’ upgrade that will introduce a new concept: the concept of blob, or ‘blob-carrying transactions’. This upgrade is part of a proposal that will lower transaction fees for most Layer 2 protocols.

I’d like to finish this session trying to explain a bit more what a blob is, and how different it is from the current Ethereum technology.

First of all, to clarify a bit how layer 2 roll ups work today, I found a basic drawing on the internet, produced by a researcher on Linkedin

• The transactions that you see on top are initiated on the layer 2 rollup - imagine the Polygon blockchain here. Basically, a rollup is a layer 2 solution that is in charge of rolling up transactions, batching them before sending them to the Ethereum blockchain. The Layer 1 blockchain.
• The rollup sequencer takes care of the transaction verification, ordering, and data compression.
• Data is sent and stored in a small data area called ‘calldata’ in order to interact with an Ethereum smart contract. This data area is where we pass the arguments of the transaction.

So what is a blob exactly? A blob is a just data chunk that provides better storage space for layer 2 rollups at a cheaper cost. It is attached to a block on the Ethereum blockchain but it’s not permanent like calldata: calldata remains in the blockchain’s history forever. Blobs are removed typically after 2 weeks, and this is what makes this storage solution cheaper.

If we look at the transaction fees on all Layer 2 blockchains today, we can see that Optimism Arbitrum and Polygon can be 20 times cheaper than Ethereum. But a simple transaction on Ethereum currently costs above $1. And the average transaction fee is currently above $5 according to BitInfoCharts… So Layer 2 fees can still be expensive because the batched transaction data still needs to be committed, written on the Ethereum blockchain. And they can be very expensive when there is substantial activity, for instance, when some popular NFT collection is issued.

‘Blobs’ would actually make rollup transactions more than 10 times cheaper.

But what we need to know is that the upgrade is expected in the first quarter of the year, and it could be an opportunity for Polygon, Arbitrum and Optimism to challenge Solana, and scale up the Ethereum ecosystem.

This event is one among many that could boost the crypto sector this year, together with:

• The ETF approval
• The institutional rising interest
• The decreasing US inflation, approaching the 2% YoY target rate.
• The next Bitcoin halving event, expected in April.

*This is not financial advice. Not intended for UK customers.