Dear Bankless Nation,
It's been a profitable year to be bullish on ETH. After the network's successful upgrade last week, we've seen a bump in market appetite for the asset, which is up more than 75% on the year.
Today, our analyst desk zooms in on other market signals in crypto worth feeling bullish about.
- Bankless team
Bankless Writer: Jack Inabinet
Markets are pumping and bears are in shambles. Bitcoin and Ethereum have both broken out of their bear market trading ranges and alts appear primed to rock-and roll!
Despite FUD flying in from every direction, be it doomers foretelling of Ether dumped en masse post-withdrawals or regulators targeting CZ, crypto has been up-only since FTX. Amid banking failures and contagion risk, crypto pumped.
It’s once again time to contemplate crypto’s age-old question: ape now or FOMO later? Today, we’re examining five key crypto indicators that can help you make the decision 🤝
📈 Open Interest Up
Perhaps the most accessible option for traders to gain leveraged exposure to crypto assets is futures.
Open interest represents the number of outstanding futures contracts held by traders that have not been offset or closed. This calculation includes both long and short positions. Generally, higher levels of open interest correlate with risk-on market sentiment and high liquidity, with a larger number of both buyers and sellers in the marketplace.
Aggregate open interest on BTC futures surpassed the pre-FTX high-water mark of $9.9B, breaking over $10B at times during trading on Tuesday and Thursday last week. It's no secret that the implosion of FTX left a gap in the crypto derivatives market; the exchange was once one of crypto’s largest.
Seeing open interest rebuild and liquidity improve is a sign of improving market conditions. Note, however, that a build-up of leverage can cause increased reflexivity when prices move against traders.
⛓️On-Chain Boom
While the macro heads debate the merits of potential recession, the on-chain economy has continued to boom.
Active total daily addresses across major smart contract blockchains has held steady at 2 million – a feat not seen since the end of the bull market in January 2022 – and has increased by 77% since bottoming in late August.
Clear signs of increased user activity are also evident in yield markets, with the aggregate DeFi yield continuing its upward trend from June, up 94.2% from the lows.
Higher DeFi yields are typically associated with higher crypto asset prices, as individuals and institutions increase on-chain trading activities or borrow to access leverage and implement yield-generating strategies. Higher yields also mean borrowers can afford higher costs of capital, indicating better capitalization in aggregate.
As the Fed battled inflation throughout 2022, risk-free interest rates offered on U.S. Treasuries continued to increase, growing competition to relatively risky crypto lending and sucking juice out of risk-on assets. Risk of inflation has somewhat moderated since peaking in June, the same month DeFi yields were their lowest, with year-over-year inflation falling below 5% in March.
Prospects of an easing rate environment have reinvigorated crypto, making the asset class as a whole more investable and DeFi yields more attractive.
🙅 Rejecting Stables
Smart money crypto participants have been increasing their net crypto exposure since the depths of the FTX crisis and have shown no signs of slowing down.
On-chain smart money stable exposure has reached its lowest point since the collapse of Terra-Luna in early May 2022, with these high-profit actors holding an average of 15% of their portfolios in stablecoins.
While the amount of free capital floating around in whale’s wallets has certainly decreased, smart money still has a considerable amount of firepower remaining before reaching bull market lows of sub 5% allocations.
Investing in stablecoins allows crypto holders to mitigate risk and limit potential portfolio drawdowns. Yet, the crisis on confidence in USDC and USDC-backed decentralized stablecoins stemming from the March banking crisis have impacted willingness to hold stables. This is an encouraging sign of positive market sentiment to see a shift from dollar-pegged assets to tokens.
📉 Volatility Crush
Heard of the VIX? It’s a derivative measuring the market's expectation of volatility in the near-future based on S&P 500 index options. During times of elevated volatility, typically to the downside, the price increases.
Crypto has its own native, on-chain market fear indices primitives. One popular VIX-mimicking derivatives platform is CVI Finance, makers of the Crypto Volatility Index, which tracks implied volatility of Ether and Bitcoin, much like its TradFi counterpart. Not only has the index been down-only in the post-SVB/Silvergate/Signature era, it is currently trading at levels previously only reserved for the bull market, breaching the pre-FTX lower boundary of $62.80.
As markets have pumped and open interest has rapidly increased, potentially increasing leverage-induced reflexivity in crypto asset pricing, it is comforting to see diminished expectations of future price volatility from the CVI Index.
🤭 What Withdrawals?
Etherians are united in jubilance at the number of validators exiting the set.
While skeptics peddled FUD in the months leading up to Shapella, suggesting weeks worth of withdrawals were on the horizon while questioning if the market could absorb the millions in Ether they anticipated would be sold, the actual situation has been remarkably bullish.
Currently, 25.7k validators are lined up in the exit queue for a full withdrawal. Kraken, forced by the SEC to deprecate their US staking operations, represents 46.5% of the queue. Given network-imposed constraints, exits should be processed and normalized within two weeks.
A primary concern for many was the potential for over 1M ETH in partial withdrawals being rapidly jettisoned from the Beacon Chain within 5 days of Shapella’s deployment. While these withdrawals are not complete, with 541k ETH remaining (only half of which has upgraded to eligible type 0x01 credentials) -- the market, so far, has seemingly absorbed the first half million of excess supply in stride.
A sizable portion of this supply has not been sold, instead being restaked to the network. Ethereum's largest staking entity, Lido, must restake their accrued rewards, as stETH is a rebasing token, helping to increase the number of validators on the Beacon Chain and counteracting withdrawal flows.
Market Takeaways
While the macro waters are slightly muddy, crypto appears to be trending towards a bullish state of mind. Majors like ETH and BTC have broken out of their depressed bear market trading ranges and altcoins look primed for a decisive upwards move.
After an overbearish, oversold 2023, investors are finding themselves underallocated and aping with size, driving up prices and placing crypto on the precipice of a miniature bull run. Smart money has heavily participated in crypto’s impressive run-up since the beginning of the year and still has plenty of capital to play with.
But this rally is about more than just price, crypto has found sustainable adoption, keeping user activity counts high and driving up DeFi yields in what has been a continued upwards trend since peak inflation in June 2022. Our crypto-native VIX equivalent has breached 2022’s lows, trading at levels unseen since the prior bull market. Ethereum’s Shapella doomerism is nothing more than last week’s news.
It certainly doesn’t seem like a bad time to be a bull…