Data Interpretation: The Repositioning of the Encrypted World Amidst the Global Liquidity Dilemma
In response to the recent liquidity issues in the cryptocurrency market, we need to take a multi-faceted approach to address them. Not only should we adapt to the fluctuations of the macroeconomic cycle, but we must also pay attention to and develop previously overlooked business areas, thereby injecting new vitality and enhancing the stability and maturity of the market.Author: Hedy Bi, OKG Research
Recently, with the opening of the ETF channel, the "huge influx of funds" that the crypto market anticipated did not meet expectations, and the issue of liquidity scarcity in the global financial market has spread to the crypto market. The opening of new channels also means that the rules of the previously complex and mature market collide with the culture and investment logic of the crypto market. Thus, the crypto market has transformed from an almost closed haven into a small boat in a vast ocean. This fundamental shift in market nature has also brought new challenges.
Bitcoin, no longer digital gold?
To understand the crypto market, we start with Bitcoin, which accounts for half of the market.
Pic: Dominance of Bitcoin and other crypto in the overall market from 2nd quarter of 2013 to 1st quarter of 2024
Source: statista
Looking back at this year, we can observe several key events. For example, the tensions between Iran and Israel in April led to retaliatory actions from Iran. Although the Asia-Pacific market did not reflect this in the financial market, Bitcoin experienced a significant drop. Additionally, U.S. economic data not only affects the U.S. financial market but also impacts Bitcoin. For instance, several increases in U.S. unemployment numbers in the first half of the year exceeded expectations, leading the market to believe this would prompt the central bank to adopt a more accommodative monetary policy, which in turn could drive a rebound in U.S. stocks and subsequently push Bitcoin up.
In the past, we viewed Bitcoin as "digital gold," believing it operated in a counter-cyclical manner to the U.S. dollar. However, it now appears that Bitcoin resembles a "magnifier" for the Nasdaq. These newly entered institutional investors find Bitcoin lacking in fundamental analysis (financial metrics and cash flow analysis) compared to traditional stocks and bonds; its value is primarily determined by market supply and demand and investment trust. Therefore, its commodity attributes combined with emotional indicators have become the quantitative trends relied upon by institutional investors. Moreover, the widespread use of leverage in the crypto market has increased Bitcoin's volatility, which is a new market characteristic we need to adapt to.
Compared to the seven rate hikes in 2022, demand in the crypto market has significantly decreased
Taking the U.S. market as an example, M2 (broad money supply) has been slowly declining since the first half of 2022. According to Macromicro.me, the seven rate hikes by the Federal Reserve from March to December 2022 resulted in a rapid decline in the U.S. market's net liquidity index, which has not increased since. The interest rate policies in the U.S. in 2022 had a significant impact on market liquidity, which did not maintain the previous growth. Consequently, demand in the crypto market has also noticeably decreased.
Source: Fred
Source: MacroMicro
We examine stablecoins to delve into the demand in the crypto market. The issuance mechanism of stablecoins means that their issuance can represent the market's demand for the crypto market. In terms of the overall market cap of stablecoins, it has increased by about $30 billion since 2024 (approximately six months). Compared to the second half of 2021 and the first half of 2022, the growth rate has significantly decreased. Moreover, the period from 2021 to the first half of 2022 coincided with a tightening of global financial market liquidity. This indicates that the crypto market has transformed from a risk-hedging market into a small boat in a vast ocean.
Pic: Stablecoin Total Market Cap
Source: DeFiLlama
Thus, we can roughly conclude that the overall style of the crypto market has shifted from a nearly closed market for hedging financial risks to a market that is more sensitive to economic dynamics, and Bitcoin has transformed from "digital gold" to a "magnifier" for markets like Nasdaq. Economic indicators will affect liquidity in the market and directly impact the crypto market.
This OTC is not that OTC, injecting liquidity into the market
Under the existing macro policies, how can we solve the liquidity issue in the crypto market? There are two general approaches: one is to promote institutional investor participation; the other is to improve market infrastructure. Here, we focus on the first approach.
In promoting institutional investor participation, over-the-counter trading (OTC) is an indispensable channel that is currently overlooked by the crypto market. Specifically, taking the global Bitcoin single currency as an example, according to CryptoQuant, the daily balance of OTC trading fluctuates between 100,000 to 500,000 BTC (calculated at a Bitcoin price of approximately $65,000, this amounts to about $6.5 billion to $32.5 billion). In contrast, Bitcoin ETFs see an average daily inflow of about $122 million (Farside Invest data, as of July 5, UTC+8), which is several dozen to several hundred times that of OTC trading.
Source: CryptoQuant
The OTC that is well-known in the crypto market is somewhat different; the OTC we are familiar with more often refers to the bridge between fiat currency and cryptocurrencies. This is because, before the emergence of compliant channels like ETFs, OTC was the main channel accessible to the public. However, from the perspective of the financial market, the other two functions of OTC - being the primary channel for large transactions and providing liquidity and market stability - are still in need of development.
Source: OKG Research
Regarding institutional investors, RWA is another commonly mentioned method. However, I believe that improving liquidity through RWA requires truly using crypto assets as the accounting unit, and RWA should be issued on public chains rather than being limited to consortium chains or private chains. Currently, RWA mainly remains on enterprise-level consortium chains or inter-institutional consortium chains. For example, in April this year, Hedera collaborated with Blackrock to tokenize money market funds (MMF) using a not fully decentralized blockchain solution.
As the Web3 market continues to evolve, we can see its inherent transformation. The crypto market has gradually shifted from a niche market for hedging risks to a market that is highly sensitive to economic dynamics. Bitcoin has also transformed from "digital gold" into a "magnifier" for markets like Nasdaq. In response to the recent liquidity issues in the crypto market, we need to adopt a multi-faceted approach. Not only should we adapt to the fluctuations of the macroeconomic cycle, but we should also pay attention to and develop previously overlooked business areas, thereby injecting new vitality and enhancing the stability and maturity of the market.
