August 26th Bitfinex Alpha | Risk appetite returns to BTC
On Bitfinex Alpha
BTC surged to $65,000 on August 23, accompanied by a broader rally in risk assets following comments from Federal Reserve Chairman Jerome Powell in Jackson Hole hinting at a potential rate cut. The announcement sent the US dollar lower and energized stock markets, with the S&P 500 nearing its all-time high. Bitcoin, which had lagged behind stocks, surged 6.06% in a single day, its second-largest daily move since May.
The rally comes against a backdrop of increasing positive correlations between Bitcoin and U.S. stocks. Bitcoin has so far underperformed stocks since hitting its lows in early August. Friday’s surge in price shows a sharp increase in correlation, which I believe is a sign of a return to risk appetite in the market.
Add to this the significant short liquidations that occurred on August 23rd, which resulted in $40 million in BTC perpetual futures liquidations, and $140 million across all pairs. This is due to the significant reduction in open interest, indicating a reduction in leverage in the market. With the increased interest in delta neutral and funding arbitrage, the market may see a reduction in directional open interest, allowing more room for price appreciation in Bitcoin and altcoins. The current funding rates, which are significantly lower than at the start of the year, indicate a change in market dynamics and highlight a more cautious approach among leveraged traders despite the overall bullish sentiment.
The market rally was fueled by recent developments in the U.S. economy, which have led to significant changes in monetary policy expectations, labor market dynamics, and business activity, highlighting the changing challenges facing the Federal Reserve and the broader economy. In a highly anticipated speech at the Kansas City Federal Reserve Board of Governors symposium in Jackson Hole, Federal Reserve Chairman Jerome Powell signaled an imminent adjustment in monetary policy, suggesting that a rate cut may be in the cards. Labor market data contributed significantly to this change in stance, with data showing that the U.S. labor market added fewer jobs than initially reported last year. This downgrade, combined with weaker-than-expected payrolls data in July, has heightened concerns about the health of the labor market. The unemployment rate hit a post-pandemic high of 4.3%, prompting concerns that the Fed may have held off on cutting rates too long. However, recent data, including weekly jobless claims, suggest that the labor market is experiencing a more controlled downturn.
Meanwhile, the noose around the crypto market continues to tighten. For the first time, China has successfully extradited an individual named Zhang, who is accused of orchestrating a $14 billion cryptocurrency pyramid scheme in Thailand. His extradition marks the first financial crime suspect to be extradited under the China-Thailand agreement signed in 2019, and shows increasing international cooperation to combat crypto-related crime.
On a more positive note in the industry, Franklin Templeton has made progress in expanding its on-chain money market fund (FOBXX) by integrating with the Avalanche network. This move will allow investors to purchase tokenized stocks, further solidifying the fund’s position in the blockchain space. The fund, which was previously established with Stellar and Polygon, invests primarily in low-risk U.S. government bonds and aims to leverage Avalanche’s technology to achieve sustained growth. In another significant development, BlackRock’s iShares Ethereum Trust (ETHA) emerged as the leader in the Ethereum ETF space, becoming the first Ethereum ETF to surpass $1 billion in net inflows. This achievement is particularly notable given that Ethereum ETFs have generally seen lower inflows compared to their Bitcoin counterparts. Grayscale’s ETHE, on the other hand, has faced significant outflows since going public, highlighting the competitive landscape within Ethereum investment vehicles.