Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Senior Quantitative Analyst, Saxo Bank
Summary: We get a lot of questions on which trackers and indicators we use to monitor the state of the crypto markets. Here we give an overview of some of our favourite trackers to monitor the market sentiment and movements.
We track many corners of the crypto market, including the crypto traders, network validators, the applications of crypto- and blockchain technology, and of course also the overall risk sentiment in the financial markets.
Standard ways to invest in cryptocurrencies are either by buying either the actual cryptos or crypto derivatives on a crypto exchange. An increasingly popular way of getting exposure is to buy a crypto tracker such as an ETN or ETP on a stock exchange, and these are typically used to get a long-term exposure. Although the AUM in these trackers are still relatively low compared to the total crypto market cap, they may be a good indicator of the long-term sentiment. One extensive study is provided by CoinShares on a weekly basis here:
The trader sentiment on the shorter term is quantified by several different indicators, whereas one important one is the inflow to crypto exchanges. If traders (and crypto miners – see later) are not looking to sell, they keep their crypto tokens in their private wallets. But if they at one point want to be able to liquidate their positions, they will transfer their holdings to exchanges, and thus a net inflow to crypto exchanges suggests an increased selling pressure. Many different provides track these numbers such as Chainalysis, here on a chart from The Block, showing how the inflows and exchange balances were high during the crash of the TerraUSD stablecoin.
When it comes to the general interest in crypto trading, The Block provides a good overview of the search activity on Google on the different cryptocurrencies:
Validators are needed to verify transactions on the different blockchains, and for Bitcoin and the current version of Ethereum, these are well-known as miners, and keep our focus here in this section. The combined computational activity of miners is measured by the total hash rate, with an example from Blockchain.com provided below for Bitcoin. The miners are rewarded both in fees and freshly minted bitcoin, and their revenue may be found on Blockchain.com too.
The miners’ profits depends not only on the price of Bitcoin, reward size and fees, but also on the electricity prices. With lower Bitcoin prices, some mining rigs may become unprofitable, and a good indication of this is found on asicminervalue.com. If too many miners are unprofitable and have to close down their rigs, it may compromise the security of the network, although this seems quite unlikeable with the current rewards and fees – read more on this here.
The number of applications for crypto technologies is an important component in the adoption of cryptocurrencies on a global basis. A major application for smart contracts is within Decentralized Finance – bank-like services such as lending, but run on a blockchain instead of having an intermediary bank. One measure of the use of these applications is the Total Value Locked in the applications:
Another popular application is NFTs – non-fungible tokens – which are unique online objects trading on a blockchain. They are currently used for online art, music and even real estate. The speculative crypto fever back in 2021 has played an important role for the increasing interest for NFTs, although the interest has fallen in 2022, as shown here:
The crypto market in 2022 has to a large extent been driven by the overall risk sentiment in the equity market, especially high-risk tech stocks and the Ark Innovation Fund, and thus the crypto indicators are only showing a part of the picture. One way which the volatility in the equity market is quantified is through the VIX index as shown below – the higher the value, the higher expected volatility.