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As of Aug. 7, Bitcoin futures open interest was about 3.02% of market value, up from about 2% in January, according to Morgan Stanley.
Dreamstime
It’s been a brutal year for
Bitcoin
,
which has lost more than half of its value by 2022. But with the price of the largest digital asset up around 20% since June, some crypto investors are beginning to wonder if the token may have already hit a bottom.
The latest sign of optimism came thanks to
Galaxy Digital
CEO Mike Novogratz, who in an earnings call on Monday said he didn’t expect “a new shoe to drop” similar to the demise of major crypto firms that went bankrupt in recent months, such as Voyager Digital or Celsius Network.
As the crypto industry exits crisis mode, Novogratz said investors are looking for a new narrative that can drive prices higher.
Of course, Bitcoin has no fundamentals to speak of. The reliability of looking at previous cycles is similarly shaky. It’s hard to put much weight in history when Bitcoin only has 13 years of existence and four bull-bear cycles to look at.
In that context,
Morgan Stanley
Equity strategists published a research note on Tuesday that seeks to find the signs to watch for when Bitcoin and other cryptocurrencies could enter a new bull cycle.
The two most important factors? The availability of leverage for crypto investors and the Fed.
“For this crypto cycle to find a bottom, we will look for expectations of fiat money supply contraction to become expansionary again, or for crypto companies to increase their crypto leverage again,” the analysts wrote.
Although the crypto market is only a few months away from its worst crisis in history, the picture for crypto influence is actually not looking too bad.
On the one hand, the failure of some major crypto lending firms and investors, such as Three Arrows Capital, makes it that much less likely that regulators will make it easier for traditional financial institutions to extend credit to crypto investors, leaving aside whether big banks even have wanted right now.
On the other hand, the Morgan Stanley researchers note, the remaining cryptolenders appear to continue to offer high returns to investors willing to lend their coins, indicating that the industry is not exactly looking to give up that business.
The crypto futures market – another avenue through which investors speculate on prices – has similarly fallen in volume, but still looks robust compared to the total market capitalizations of Bitcoin and
Ethereum
.
As of Aug. 7, Bitcoin futures open interest was about 3.02% of market value, up from about 2% in January, according to Morgan Stanley. Part of this increase may be due to the increased popularity of Bitcoin exchange-traded products, which as of now are only allowed to hold futures rather than see Bitcoin.
That leaves the Fed as the single most important factor that could push Bitcoin’s rally.
The tight correlation between Bitcoin’s market cap and broad money supply “continues to show that the availability of central bank fiat liquidity is what you should watch,” the researchers wrote.
In recent days, Bitcoin and stocks have risen on the assumption that the Federal Reserve Board may have to stop interest rate increases sooner than expected if a recession looms. It has come despite several members of the board indicating that they remain focused on stopping historically high inflation and do not see weakness in the labor market that will give them pause.
Bitcoin supporters often tout digital tokens as a technological revolution that will eventually change the way people store value and send and receive money. But for investors, at least for now, the name of the game is all too familiar: What will the Fed do?
Write to Joe Light at [email protected]
