Optimism regarding the approval of a spot bitcoin ETF application has led to an almost 49% increase in BTC’s price since October. It is likely that the Securities and Exchange Commission will approve or deny multiple applications simultaneously for logistical and consistency reasons. (Figures cited are as of Dec. 18 unless noted otherwise.)
BTC trading on the spot market is concentrated on several exchanges: Coinbase, Binance, Bybit, and OKX. These exchanges account for approximately 65% of spot BTC trading. Binance holds a 35.5% share, while Bybit, OKX, and Coinbase hold 11.3%, 9.2%, and 8.9% respectively.
The average order size for BTC has been decreasing since early 2021 and is currently around $1,652. While smaller order sizes are typically associated with retail customers, many institutions also divide their trade orders into smaller ones to minimize slippage. It would be unwise to solely attribute recent trading patterns in BTC to retail customers based solely on order size analysis.
Coinbase’s trading summary for the third quarter of 2023 indicates a decline in volume in three out of the past four quarter-over-quarter measures. Both retail and institutional traders have experienced a similar decline in volume over the past year, with retail customers trading approximately $4.2 billion and institutional customers trading around $24.7 billion in the third quarter.
CME Group’s BTC futures open interest has reached $4.55 billion, accounting for approximately 25% of the total BTC open interest. The current open interest level is similar to that of the second quarter of 2022.
The majority of CME BTC futures positions are held by asset managers and leveraged funds. Asset managers tend to have a long bias, while leveraged funds exhibit a short bias. This aligns with the fact that asset managers typically have a longer time horizon for investing compared to other buy-side customers. Hedge funds and commodity trading advisers (CTAs), on the other hand, tend to trade with a shorter time horizon and engage in basis trading and hedging.
Institutional investors are becoming more active in the crypto space. CME Group reports that the average number of large Bitcoin open-interest holders, with at least 25 contracts, reached an all-time high during the week of November 7, 2023.
The funding rate of perpetual futures aligns the futures price with the spot price of BTC. When the funding rate is positive, long contract holders pay the funding fee to short contract holders, and vice versa. The funding rate has been trending higher along with the spot price of BTC, indicating a bullish sentiment and bias.
The historical relationship between BTC prices and consumer interest has recently decoupled. If the assumption that consumer interest is solely driven by retail customers is true, then it appears that either:
- Institutional investors are showing a constructive sentiment. The upward shifts of the futures curve in each month of the fourth quarter of 2023 suggest bullish activity and a long bias among institutional investors.
- The approval of the ETF is already priced into bitcoin prices, and the positive momentum from the announcement may be offset by traders taking profits. This suggests a possible reversion to the mean in the days following the announcement. Afterward, the market will likely refocus on the halving event in April.