Institutional top of mind | #7

Keep up with the top industry updates as we present bi-weekly market insights that are important to traders in the institutional space.

In this week's edition, Kelvin Lam, CFA, Head of Institutional Research for OKX, delves into the underlying factors and implications of October's market rally. We also discover the driving forces behind this surge and gain insights into the potential obstacles hindering institutional entry into the crypto space.

Top of Mind: what does October's market rally reveal about market sentiment and trader behavior?

A different perspective of October's market rally

• In October, Bitcoin experienced a remarkable surge of 28.5%, reaching its highest level since May 2022 before the Terra-Luna crash. This rally is widely attributed to the growing anticipation surrounding the potential approval of spot Bitcoin exchange-traded funds (ETFs) by the US Securities and Exchange Commission (SEC), as reported by Bloomberg*. Concurrently, the spot trading volume on cryptocurrency exchanges witnessed a significant increase compared to previous months (first chart), though it still lags behind the activity level observed in the first quarter of this year. To foster a healthier and more vibrant cryptocurrency market, further progress is needed to catch up and elevate the overall activity level. This observation becomes evident when examining the order book market depth for the BTC spot market on the OKX platform in the second chart below. Despite the price surge and heightened trading volume, the market liquidity level remains stagnant throughout the month, indicating that market makers have yet to fully engage in trading activities and expand their involvement on cryptocurrency exchanges.

Source: The Block

Source: OKX

*Bloomberg, https://www.bloomberg.com/news/articles/2023-10-31/bitcoin-s-btc-etf-momentum-is-spurring-the-biggest-monthly-gains-since-january?utm\_source=website&utm\_medium=share&utm\_campaign=copy , Nov 1, 2023.

Analyzing market sentiment from the derivatives market

• By analyzing the trading data of both perpetual swaps and the options market, they show robust signs of bullish sentiment and a positive market outlook. In the perpetual swaps market, the BTC open-interest-weighted funding (first chart below) has steadily risen throughout the latter half of October and remains at an elevated level. This upward trend suggests a significant presence of long positions, indicating growing confidence among market participants. Similarly, the option market exhibits a bullish signal. The BTC option 25 delta skew flipped to positive in mid-October (second chart below), indicating that option traders are increasingly willing to pay higher prices for call options compared to put options. Collectively, these data underscore the prevailing positive sentiment and the increasing preference for long positions and call options, indicating the market rally may have legs.

Source: Coinglass

Source: The Block

An institutional-driven rally

• The current market rally exhibits clear indications of being primarily driven by institutional traders. A notable factor supporting this observation is the trading activity surrounding BTC Futures on The Chicago Mercantile Exchange (CME). As the CME's BTC Futures contract comes with a unit size of 5 BTC, it's known as the preferred trading venue for traditional finance participants and institutions. On October 23rd, the open interest for these futures reached an all-time high of 100,375 Bitcoin units. In contrast, other cryptocurrency native trading platforms have seen relatively minimal changes in open interest. This highlights how institutions have been gaining exposure to Bitcoin through conventional financial channels in recent weeks and the prominent role of institutional traders in propelling the ongoing market rally.

Source: CME, OKX

• This institutional-driven trend is further demonstrated by the flows of digital asset investment products, which track the fund inflows of crypto ETFs. According to CoinShares**, the latest data reveals the highest net inflows in 1.5 years, amounting to $326 million. Notably, over 90% of these inflows are attributed to Bitcoin-related products, underscoring the increasing preference of traders to gain exposure to Bitcoin through traditional financial instruments. These observations collectively affirm the significant presence and impact of institutional traders in the ongoing Bitcoin market rally.

**CoinShares, Volume 155: Digital Asset Fund Flows Weekly Report, Oct 30, 2023.

Source: CoinShares

• In contrast, the on-chain activity for BTC appears to be relatively muted. The accompanying graph illustrates the daily tracking of active addresses, which has been smoothed using a 14-day exponential moving average (EMA) to provide a clearer time series. Typically, high activity and upward trends indicate increased transactions, new demand, and growing interest in Bitcoin through on-chain access. However, the recent uptick in on-chain activity is relatively modest, returning to levels seen in the first quarter of this year. There's also a notable disconnection between the on-chain activity and the price of BTC, unlike the close relationship observed in the first quarter.

Source: Glassnode

• As observed from the above, institutions show a strong preference for entering crypto space through traditional financial gateways. This inclination is evident in discussions among institutions, which shed light on the complexities and risks surrounding crypto custody that hinder institutional adoption of digital assets.

Enhancing crypto custody for institutions

• The issue of crypto custody has emerged as a significant concern, and in some cases, a barrier for institutions, particularly in light of the FTX bankruptcy incident last year. However, since then, the industry has witnessed rapid advancements and the emergence of high-quality solutions specifically designed to address the needs of institutions venturing into the digital asset space. At OKX, we partner with custodians who provide institutional clients with enhanced transparency and greater control over their funds, all while ensuring optimal capital efficiency, cost-effectiveness, and robust security measures. By working closely with our clients and industry stakeholders, we've expanded our custody solutions to better cater to the unique requirements of institutions. Moreover, we continue to introduce innovative solutions aimed at streamlining the entry of institutional players into the crypto market during this period of positive market momentum and increasing institutional interest.