Market update: Still no signs of optimism

The bitcoin price fell 4% over the past seven days, dropping below the critical technical level at $40k. All the top 3 coins by market cap continue following each other closely and are down between 3% and 5%. The 90-day correlation between bitcoin and ether is still elevated, sitting at 0.92, which is close to an all-time high. Bitcoin’s correlation with the S&P 500 also continues to grind upwards, currently sitting at 0.59, also close to an all-time high. The entire market is eyeballing the outcome of this Wednesday’s FOMC press conference. The market expects a 50bps rate hike and an announcement of a balance sheet normalization, expected to start in May. The market anticipates further rate hikes this year, anticipating that the FEDs fund rate will exceed 3% by early 2023. The FED effect has pressured risk assets throughout the year, leading correlations to grow. Overall, the crypto market sees broad declines, with especially smaller coins struggling. Several coins have plummeted more than 20% over the past seven days, with Axie Infinity (-29%) being the worst performer. Bitcoin and stablecoin dominance on the rise As usual during poor market conditions, Bitcoin and other large caps have outperformed the smaller coins as a flight to safety has been going on in the crypto market so far this year. Of the indexes we track, Bitcoin (-16%) and Large Caps (-17%) moved in tandem in April, as correlations remain very high. Similarly, the Small Caps (-29%) and Mid Caps (-30%) performance aligned closely with both indexes struggling during these pressured market conditions. In the last week, bitcoin’s market dominance has increased further, reaching 42.4%, mostly caused by the weak Small Caps and Mid Caps performance. Stablecoins also see growing dominance. UST has entered the top 10 of coins by market cap, becoming the first algorithmic stablecoin to achieve this. We now have three stablecoins among the top 10, and 4 among the top 11, illustrating the current flight to safety tendencies in the market. Four weeks of fear and misery We now enter the fourth week of the Fear and Greed Index indicating “Fear” or “Extreme Fear”, nearing the most extended period of fearful market sentiment in 2022. One of the factors used to calculate this index is the performance of altcoins relative to bitcoin, and as we mentioned in the previous section, altcoins have been bleeding lately. Small uptick in bitcoin’s spot volume We see a slight increase in bitcoin’s trading activity this week, although the spot volume remains in the same depressed range as it has been since February. The increase is part of normalization in trading activity after an unusually quiet middle of April. Especially weekend volumes stayed exceptionally low in April, but last weekend saw a relatively strong spot volume, signaling that weekend traders could be returning to the market. The price stability continues for bitcoin Last week the 30-day volatility dropped to levels not seen since November 2020. Although the volatility slightly increases this week, it's still meager historically. Bitcoin's current low volatility is especially interesting compared to Nasdaq's recent elevated fluctuations, as bitcoin has tended to be very volatile during difficult periods for risk assets. Lower highs and lower lows Now over to the technical analysis. Bitcoin is currently trading in a downtrend, seeing lower highs and lower lows. For now, the $38,000 support has been held after being retested over the weekend. Below $38,000, BTC has previously found support in the $36-37,000 range, but the key support area is found in the range lows at $33-34,000. Towards the upside, $42,000 acts as the key resistance, although BTC has met resistance around the psychological barrier of $40,000. Futures premiums remain at historical lows The futures basis across all relevant markets stays low. Binance and FTX’s futures premiums have settled in the range of 2-3%. Previous visits to such muted levels have tended to be short-lived, whereas this low premium regime now has lasted for nearly a month. CME’s premium also remains muted. US BTC ETFs saw large outflows in April. This has likely been the key contributor to pressuring the premiums lower, but overall bearishness and caution from institutional traders likely also have effects. The sustained muted futures basis signal persistent pessimism from active market participants. Perpetual sluggishness in perps As has been the case throughout 2022, funding rates remained neutral or below neutral this week as the perp market has entered a state of perpetual sluggishness. This is the fifth consecutive month without funding rates once breaking the neutral level on Binance and Bybit. This is highly remarkable, as this regime is nearly two times more lengthy than the duration of a similar regime during the summer bear in 2021. Open interest remains elevated above 250,000 BTC. But overall, traders seem risk-averse, liquidations low, and the derivatives market seems rather “dead”. Bitcoin on-chain summary: Hashrate at an all-time high After slowing its growth in March and April, the hashrate has accelerated its growth lately, hitting an all-time high of 221 EH/s. The surging hashrate led to a rapid block production rate of 6.45 blocks per hour one week ago, much faster than the desired rate of 6 blocks per hour. To lower the block production to the desired level, Bitcoin increased its difficulty one week ago to an all-time high. Never has it been harder to mine bitcoin. Difficulty at an all-time high has not discouraged new hashrate from coming online, and the block production rate keeps staying at elevated levels. Because of this, we might see another considerable upwards difficulty adjustment around one week from now, pushing the difficulty even further upwards. We see a 7% increase in Bitcoin's daily transaction fees. Still, they are sitting at a meager $420,000, especially when compared to Ethereum's all-time high daily transaction fees last Sunday of $231 million. Bitcoin's depressed transaction fees are part of the reason why bitcoin miners consistently have been earning less than ether miners for more than one year.