BloFin Whale’s View: Magnifinger 3

Similar to the US stock market, the liquidity of the crypto market is concentrated in the major cryptos such as BTC, ETH and USDT. These cryptos have wider channels and more tools to access liquidity and better withstand a long-term high interest rate environment. Conversely, after a 1-2 percent reduction in realized interest rates, the performance of altcoins may improve.

“It's the liquid, my friend.”

A bull market is not seen in just one market. As crypto investors enjoy the bull market cycle, the Nasdaq and S&P 500 are constantly hitting new highs. Precious metals such as gold and silver are also not to be missed, with their performance reaching their best level in five years.

In the interest rate market, traders are optimistic that the Fed will start cutting interest rates in September, and 4-5 rate cuts in the next 15 months will allow global investors to enjoy a feast no less than the bull market cycle in 2021.

A SOFR adjustment rate that directly reflects interbank financing costs. Source: CME Group

However, unlike the previous bull market, which occurred with zero interest rates and excess liquidity, this bull market was born against a backdrop of high interest rates. We are experiencing the highest interest rate period since the beginning of the 21st century; Only the internet bubble cycle from 1995 to 2001 can be compared. Interestingly, these two bull market cycles have many similarities.

Changes in the Fed funds rate effective from June 2024. Source: FRED

The US banking crisis of 2023 was spectacular. But similar events occurred in the 1980s and 1990s, and the magnitude is no less than in 2023: the impact of that year's bank failures could be even more significant if inflation is taken into account.

The number of US bank failures since 1934. Source: PEW Research Center

The high number of bank failures has severely damaged investors' confidence in the banking system and savings. While Greenspan and Powell prefer to keep interest rates high for a long time, many investors still forego deposits and risk-free returns instead of investing in risky asset markets. This led to a sharp slowdown in deposit rate growth in the 1990s, and the same trend happened again 30 years later.

Changes in deposit rates in commercial banks from June 2024. Source: FRED

However, even if investors choose to enter the risky property market, they remain cautious: they usually prefer to invest in stocks and other stocks with sufficient potential, large market capitalization and attractiveness. In 2000, the “Internet revolution” was about to reach its peak; In 2024, AI will emerge. Both investors chose to buy the next generation; In the year In 2000, the baby boomer generation took over MSFT, CSCO and INTC. Now, their children hold NVDA, BTC and ETH.

2000 Top 20 S&P 500 Companies by Market Value. Source: Finhacker

Hey! Don't forget that we are still in a high interest rate environment. Despite the availability of funds from multiple sources such as deposits and wages, investors still cannot laugh off investment failures as they did during the liquidity flood.

The above led to an interesting incident. Although investors are willing to hold risky assets and invest in new narratives, they still hope to find targets with sufficient risk protection in the risky asset market. There is no better choice than large-cap stocks: they have enough liquidity, enough derivatives to cover risk, and a sizeable investor base.

As a result, the Matthews effect occurred: investors flocked to buy large stocks as “safe havens,” further increasing their market cap and attracting more like-minded investors. Eventually, the market's focus increased. In the year In 2000, the total market value of the Top 10 stocks accounted for 27 percent of the total market value of the S&P 500 index, a new high in decades. This rate has reached 33.5% today, which is higher than before.

Changes in S&P500 concentration level since June 2024. Source: Goldman Sachs

We are going through the same process for the crypto market. The Magnificent 7 dominates the US stock market, while the Magnificent 3 (BTC, ETH and USDT) is supported by many ETF providers and sought after by investors, accounting for over 77% of the crypto market cap. MegaCap cryptos have achieved stronger returns than altcoins. For HODLers, holding BTC and ETH is a perfect business. Investors can earn an average annual return of over 50% over the past five years simply by buying and holding. In contrast, the earnings from altcoins are relatively insignificant.

Comparison between performance of MegaCap cryptos and Ex-MegaCap cryptos as of June 2024. Source: SP Global

The current macro environment is favorable for the Magnificent 3 cryptos to gain more market value. Since the beginning of 2024, the market share of altcoins has dropped from 22% to about 16%. The high interest rate environment will continue for months, so it's not easy to see altcoins outperforming in the short term.

Changes in cryptos' market shares in the last 12 months. Source: Coinmarketcap

A race between the brave: ETH's turn?

Of course, investors' investment in Magnificent 3 is not permanent. As the official listing date of spot ETH ETFs approaches, traders gradually adjust their investment portfolios. The relative strength of BTC has been for several months, but investors are changing their views: it seems that they believe that the performance of ETH will strengthen for some time with the list of ETH ETFs in the area.

Options volatility data reflects changes in investor expectations. For most of the year, BTC skewness data is more skewed than ETH. However, this situation has changed in recent weeks. Investors' expectations for BTC's short-term performance are skewed toward “neutral” and “slightly bullish,” while ETH's short-term performance is relatively more bullish.

Investors still have a clear bullish view of BTC and ETH's medium- and long-term performance. However, their bullish attitude towards ETH has gone beyond that towards BTC. One possible reason is that assets with relatively low marketability and relatively high volatility have better return potential during interest rate-cutting cycles. Additionally, the “value allocation period” after the approval of the spot ETH ETF will have a positive impact on the BTC/ETH price, as experienced in February and March.

Changes in BTC 25delta skew in the last 14 days. Source: Amberdata Derivatives

Changes in ETH 25delta skew in the last 14 days. Source: Amberdata Derivatives

The value of the “property allocation period” can also be determined. The recent ETH/BTC futures time frame indicates that investors believe that ETH will outperform BTC over the next few months and will push the exchange rate higher in the short term. The risk premium difference between ETH and BTC has narrowed to 25bps, and investors are eagerly anticipating the potential new wealth gains in ETH after the listing of spot ETH ETFs.

ETH/BTC futures exchange time structure. Source: Deribit Metrics

BTC-ETH Risk Premium Divergence. Source: Deribit Metrics

In terms of volatility, investors also expect ETH to experience relatively high volatility in the coming months (17.6%/30 days, 33.5%/90 days). Ideally, breaking ETH at $4.1k is not difficult; Considering that ETH currently has a more negative gamma than BTC, the hedging behavior of market makers will be a big force to increase the price.

ATM boxplots of ETH. Source: Amberdata Derivatives

ETH Latest Dollar Standard Gamma. Source: Amberdata Derivatives

BTC Latest Dollar Standard Gamma. Source: Amberdata Derivatives

In the spot market, ETH whales have stopped shorting their ETH holdings. Interestingly, whales have reduced their holdings of BTC in recent months; This is probably because miners regularly sell BTC for cash, but obviously, we can't rule out portfolio adjustments.

As of June 21, 2024, the number of addresses with BTC is higher than 100. Source: Glassnode

As of June 21, 2024, the number of addresses with ETH is higher than 1,000. Source: Glassnode

Overall, adding some ETH-long exposure in the near term is a more accurate choice. Also, long-term holding is not a problem for BTC, but “wait and see” may be one of the few options for altcoins.