The situation could change dramatically if institutional investors enter the market in earnest.
In addition to the relationship between interest rates and Bitcoin, you pointed out a "certain law" of the cryptocurrency market.
Currently, the cryptocurrency market is booming, led by Bitcoin, but how do you think it will develop in the future?
Virtual Nishi: First, to summarize the current situation, Bitcoin has been gaining momentum since the approval of a spot Bitcoin ETF, and as a result of the inflow of funds, it hit an all-time high in March, exceeding 10 million yen in Japanese yen.
However, if we trace the source of the inflow of funds into this spot Bitcoin ETF, most of it is from individual investors, not institutional investors.
Furthermore, while Bitcoin has previously hit its all-time high after the halving, this time it hit a new all-time high before the halving.
This is a unique case compared to when it hit its all-time high in 2021, and in US dollar terms, it is almost the same price range as the all-time high of $69,000 as of 2021, so considering the strong positive factor of ETFs, I think there is still potential for it to rise.
The situation may change in the future when institutional investors enter the Bitcoin spot ETF market in earnest.
Traditionally, institutional investors look at a six-month track record, or investment performance, when a new financial product is released.
The spot Bitcoin ETF was approved on January 11, 2024, so the investigation will be completed around July 10 and the analysis will be completed around August. Based on that data, institutional investors are expected to make investment decisions from around early September.
Also, looking at the annual halving, except for years when the halving occurred at the end of the year, the high price is updated at the end of the following year.
As for this year, as I mentioned earlier, there is a possibility that institutional investors will enter the market from September, and interest rates are expected to start being lowered from October to December 2024.
If these things happen at the same time, I think that the market will be excited around the end of the year as usual and the highest price will be updated.
Regarding the relationship between interest rates and Bitcoin, there is also a common factor that large-scale monetary easing policies were implemented before and after past halvings.
For example, around the time of the first halving, there was a large-scale monetary easing policy due to the Lehman Shock. During the second halving, Japan was the leader in the global cryptocurrency market, and the Bank of Japan also implemented an unprecedented monetary easing policy at that time.
The third halving coincided with the still-remembered COVID-19 pandemic, which led to global monetary easing. As such, it should be remembered that monetary easing and the price of Bitcoin are closely related, even though it has not been implemented many times yet.
Bitcoin's supply volume decreased due to the recent halving, but what do you think the impact of this is?
Virtual Nishi: The number of bitcoins that have been lost private keys or cannot be withdrawn for some reason continues to increase every year. In the Web 3.0 area, this is what is known as "GOX".
The blue line in the separate figure shows the number of bitcoins in circulation on the market, excluding those that have not moved for seven years. Many people would imagine that the amount of bitcoin in circulation on the market will continue to rise, but as you can see from this figure, the actual amount in circulation on the market is high and is actually declining.
This, combined with the quantitative easing of fiat currencies that I mentioned earlier, has led to an increase in the price of Bitcoin, which has been the mechanism behind this so far.
Actual number of Bitcoins in circulation: Created by Kasou Nishi from Glassnode
Are there any other factors that could affect the cryptocurrency market?
Virtual Nishi: As with Bitcoin, I believe that the "Crypto 3 Conditions" are important for the rise of the cryptocurrency market in the past. The first one is that, as I mentioned earlier, "major central banks have a tendency toward monetary easing."
The second is that the stock market volatility index is at a low level. What this means is that, first of all, funds call the volatility rate based on past price movements, etc., the "risk amount."
For example, if the price movement of a certain financial product is flat, it is called "a gap has appeared in the risk amount."
When this gap appears in the risk amount, funds may flow into cryptocurrencies such as Bitcoin. In particular, hedge funds that make profits from price differences tend to invest in highly volatile Bitcoin, etc. However, when the stock market is volatile, there are few funds that will go out of their way to put money into Bitcoin, which is more volatile.
In addition, there is an index called the "VIX index" that allows general market participants to determine the amount of risk. The VIX index is an abbreviation for "Volatility Index" and is also called the "fear index" in Japanese.
When this index exceeds 20, the market is considered to be highly volatile and has a high amount of risk. Conversely, if this index is below 20, the amount of risk is low and it is called the optimum market temperature.
When Bitcoin has reached its all-time high three times in the past, the fear index was around 10 in all cases, so the amount of risk was low.
On the other hand, when Bitcoin crashed in early February 2018, the fear index was at a very high level of over 50. At that time, it was also called the "VIX shock."
By the way, the current fear index is below 20, which can be said to be at the optimum market temperature.
Finally, the third condition is that interest rates are on a downward trend. The US is expected to cut interest rates two times this year, so this condition may be met right around the end of the year.
However, current factors that could lead to inflation include rising oil prices due to geopolitical risks in the Middle East, so it has been pointed out that there may only be one interest rate cut this year. It will be necessary to watch developments carefully.
Please let us know if there are any indicators that you think are important to pay attention to when watching the market.
Virtual Nishi: This depends on whether you look at it in the short term or the long term. First, if you look at it in the medium to long term, the "crypto 3 conditions" and fundamentals mentioned earlier are important.
And from a short-term perspective, there are many indicators to consider, but I think that there are three indicators that are particularly important.
The first is the price of the futures market at a major overseas cryptocurrency exchange. For example, let's say that there is a cryptocurrency whose current price is 100 yen, and the trading price of the 3-month futures is 6% higher at 106 yen.
In this case, it will tend to be overbought, and there is a possibility that selling will occur later. On the other hand, if the trading price of the 3-month futures falls below 100 yen in this case, it will be oversold, and there may be a chance to buy later.
And if the trading price of the 3-month futures is 3% higher than the current price at 103 yen, this will be neutral, and there will be a balance between selling and buying.
Why is it considered balanced when the trading price of the 3-month futures is 3% higher?
Virtual Nishi: At some overseas cryptocurrency exchanges, when the ratio of long (buying) and short (selling) positions is 50:50, a fee of 0.01% is charged to the long side every 8 hours.
This fee is commonly called the "funding rate." If you do this for a day, for example, it will be 0.03%, and if you do it for 90 days, it will be 2.7%. In reality, it increases with compound interest, so the actual value will vary, but it is roughly close to 3%.
So, taking this into consideration, a 3-month futures trading price that is 3% higher than the spot price can be said to be a balanced and neutral state.
By the way, generally, when the supply and demand of the spot is tight, the futures price will fall. In particular, the phenomenon in which the futures price is cheaper than the spot price is called "backwardation."
This phenomenon occurs when short positions increase as a risk hedge. What this means is that, for example, when you buy a cryptocurrency in spot form for 100 yen, you will simultaneously enter a short position in futures trading.
When spot purchases increase, short futures positions also increase, causing futures prices to fall. If the spot price rises by 1%, the valuation of those who have short positions will be minus 1%, but the total will be zero, so there is no loss.
In other words, it protects your assets. On the settlement date of futures trading, there is "short covering" to settle short positions, so prices tend to rise.
In situations like this, the market tends to rise significantly, so it is a good opportunity to buy.
Could you tell us about the remaining second and third indicators?
Virtual Nishi:The second is the "transition of active OI." Active OI refers to unsettled positions created by market orders, that is, positions that remain unsettled in futures trading.
Orders created by market orders tend to be closed quickly. This is because market orders are used when you want to trade quickly.
A state where active OI is accumulated means that volatility is likely to increase, so it is not surprising that a large-scale settlement chain occurs in the derivatives market at any time. It is like a balloon that is inflated to the brim and you don't know when it will pop.
When this active OI is almost gone and empty, it is difficult for a chain of buys or sells to occur in the derivatives market.
It's like a state where there is no fuel to inflate the balloon. Especially during an uptrend with strong buying in the spot market, when active OI is empty, it means that there is no active long position OI in the derivatives market that would result in spot selling, so there is a tendency for it to rise significantly.
Finally, the third is the funding rate mentioned earlier. If this is negative, it can be seen as a large number of short positions.
Conversely, if the funding rate is positive, it means that there are many long positions. Generally, if the funding rate is negative, the spot price tends to rise.
The above is a short-term view. In any case, it is important to look closely at the internal trends of the positions that are forming the price, and ultimately the contents.
Of course, this does not apply when external factors that affect not only the cryptocurrency market but also the real world appear.
I hope you will recognize that in normal times and in the short term, such logical trading methods are often effective.
Please tell us if there are any points to be careful of when investing in the current cryptocurrency market.
Virtual Nishi: I think it is a good idea to always check whether the founder's philosophy and white paper of each stock are deviating from the original policy.
Although scammers are no longer rampant like they were in the ICO days, and legal frameworks to clean up the cryptocurrency industry are being developed globally, please remember to manage your assets with a sense of ownership rather than leaving them to others.
Finally, please say a few words to our readers.
Kasou Nishi: SBI VC Trade has been in the black thanks to the daily efforts of our employees, and we have recently added an excellent CTO, but we are currently expanding our business and are looking for new staff. We hope you will pay attention to us as a place to work!
Interview date: April 25, 2024
◉Virtual Nishi
SBI VC Trade (Crypto Analyst/New Business Strategy)
SBI Holdings Digital Space Office Deputy Director (Web3 Promotion)
Using his experience as a dealer, he analyzes the cryptocurrency market, including on-chain data, and disseminates information on Twitter as well as commenting on the cryptocurrency market in newspapers and magazines.
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