Biweekly Market Report (2020/01/13 ~ 2020/02/03)

BTC/USDT (Binance)

8,110 (01/14) → 8,720 (01/20) → 8,340 (01/25) → 9,352 (01/31) → 9,353 (02/03) is a summary of the price movements of Bitcoin futures (Binance) for the past two weeks.

All price data were collected on 02/03 15:00

Figure 1: BTC/USDT (Binance) Recent trends (daily line). Source: AIcoin

Bitcoin has started to enter a bullish trend since the beginning of this year. Its price has broken through the annual and monthly lines within the past 10 days. With the price rapidly increasing, it should be noted that the transaction volume has not significantly increased. It means that there is no substantial increase in demand. Asynchronous volume and price may cause the market to fail to support excessively high prices.

ETH/USDT (Binance)

143.58 (01/13) → 166.87 (01/20) → 160.35 (01/25) → 179.99 (01/31) → 190.75 (02/03) is a summary of the price movements of Ethereum futures (Binance) for the past two weeks.

All price data were collected on 02/03 15:00

Figure 2: ETH/USDT (Binance) Recent trends (daily line). Source: AIcoin.

Compared with Bitcoin, the mainstream currency that has seen the biggest increase recently is Ethereum. In addition to the overall increase in the crypto market, ETH performed very strongly when other currencies entered consolidation after the 01/29 period. Starting 01/13, the rise marked a 32.8% increase.

The Bincentive trading team summarizes the following three points that may explain this phenomenon:

Halving and the CME Premium

Everyone who has been closely following crypto knows that Bitcoin is about to halve in 2020. The concept of halving’s causing an expected rise comes from the law of supply and demand in economics. If supply is reduced and demand remains constant, the natural price will increase to show that Bitcoin has become scarcer. Buying futures in the period of halving has become one of the means to bet on Bitcoins bullish trend.

Arcane Research’s report found that the CME (CME Group) Bitcoin futures premium and cryptocurrency exchange premiums have a golden cross on the same May futures.

Our previous report mentioned that the price of futures represents investors’ expectations for the future. CME’s bitcoin futures are slightly different from futures on cryptocurrency exchanges.

Crypto Exchanges

Most of the participants in futures on cryptocurrency exchanges are investors who have rolled out in the market. These investors hold a variety of cryptocurrencies and use crypto-to-crypto transactions to purchase futures. Their response to the halving market, whether bullish or bearish, should be close to completion.

CME Exchange

Participants of Bitcoin futures on the CME exchange are new investors in traditional financial markets who want to use fiat as entry. Their speed of receiving information about the currency circle is slower than the original participants.

The Bincentive trading team, according to research, believes that the premium generated by CME futures is the response of new investors coming to the halving market.

Mini Conclusion

The halving of Bitcoin is expected to occur on 05/17, and the Golden Cross is also expected to occur during May futures. The Golden Cross represents that new investors (CME) are willing to pay more fiat to enter the crypto market. A premium of 5% indicates that these new investors are optimistic about the market situation of Bitcoin after halving.

Figure 3: CME and crypto exchange futures premium relationship. Source: Arcane Research.

USDT’s OTC premium picks up

Tether said that the USDT issued by the company is anchored to the US dollar at a ratio of 1:1. But in fact, the USDT’s collation and issuance lacked transparency, and even Tether’s general counsel acknowledged: “USDT currently only has 74% of the US dollar’s reserves.”

In the absence of a 100% U.S. dollar reserve, USDT and the U.S. dollar are no longer maintained at a 1:1 anchor of the U.S. dollar price. At the same time, there has been a long discussion in the market for Tether and Bitfinex to manipulate the market price by issuing additional USDT.

For Example

Tether issues additional USDT and recharges it to Bitfinex to purchase BTC. In order to obtain USD and not affect the BTC price, Bitfinex must sell BTC off-market, and the price of BTC off-market is determined based on the market price. If there is a slight premium or drop in the middle, it will be flattened by arbitrage traders, so that the price of BTC on and off the market is similar.

Step 1

Tether issues a small amount of USDT to recharge into Bitfinex to buy BTC, causing the BTC price to rise. At this time, the arbitrage trader sees the BTC increase, goes to the OTC to buy BTC and then sells it at Bitfinex to obtain USDT. He then exchanges USDT back to USD to complete the “arbitrage transaction”.

Step 2

Because Step 1 allows Bitfinex to have a bunch of BTC, and the market would have circulated a bunch of USDT at a discount. Bitfinex sells the BTC off-market to obtain USD in order to cash out.

What if Tether issues an excessive amount of USDT?

Step 1

Tether issues an excessive amount of USDT to buy BTC, causing the BTC price to rise. At this time, the arbitrage trader sees the BTC soar, and buys BTC off the market, and then sells it at Bitfinex to obtain USDT. When arbitrage traders want to change USDT to USD, they find that the USDT in the market is inflated. There is an excess of USDT that the market wants to run, causing the USDT/USD price to fall.

Step 2

Because Step 1 dumps USDT/USD and results in panicking market sentiment. This increases the selling pressure of USDT/USD and eventually USDT’s value would plummet.

Mini Conclusion

After understanding the operation mechanism of Bitfinex, we looked back at the USDT/USD OTC premium of OKEx and found that USDT/USD fell slightly before 12/01 to 01/15. In addition to the potentially terrifying scenarios mentioned above, the normal explanation is that many are off-ramping USDT into USD. The USDT/USD price rises after 01/15 represents the market’s rising temperature.

Figure 4: USDT’s OTC premium. Source: OKEx’s Trading Big Data.

BTC Leverage Ratio

The concept of the long-to-short ratio was explained in previous issues, so we won’t repeat the explanation here. The current long-to-short ratio is at a relatively high point. Investors may have to beware of the domino effect caused by the long-to-short imbalance.

Figure 5: BTC leverage ratio. Source: OKEx’s Trading Big Data.

Market Outlook

Based on the above observations, we believe that in the short term, it may be necessary to guard against large fluctuations based on the long-short ratios in leverages. In the medium term, the rise in the USDT/USD premium represents a good positive market signal. As monthly futures premium crosses gold, BTC’s halving is also driving the bull market.