Data interprets the repositioning of the crypto world: the pain of transformation under the global liquidity dilemma

Author: Hedy Bi, OKG Research

Recently, with the opening of the ETF channel, the “amount of funds” expected by the crypto market has not reached expectations, and the lack of liquidity in global financial markets has spread. to the crypto market. The opening of new channels also means that the rules of the previous complex and mature market will collide with the culture and investment logic of the crypto market. As a result, the crypto market has changed from a nearly closed haven to a small boat in the vast ocean. Fundamental changes in the nature of the market also bring new challenges.

Bitcoin, no longer digital gold?

To understand the crypto market, we start with Bitcoin, which accounts for half of the market.

Pic: Dominance of Bitcoin and other crypto in the overall market from 2nd quarter of 2013 to 1st quarter of 2024
Source: statista

Looking back at this year, we can observe several key events. For example, in April this year, tensions between Iran and Israel led to Iran's retaliatory actions. Although the Asia-Pacific market's reaction was not reflected in the financial market, Bitcoin experienced a significant decline. In addition, U.S. economic data not only affects the U.S. financial market, but also stirs the nerves of Bitcoin. For example, in the first half of the year, the number of unemployed people in the United States rose several times and exceeded expectations. The market will think that this prompted the central bank to adopt more loose monetary policies, which in turn can promote the rebound of U.S. stocks and also promote the rise of Bitcoin.

In the past, we regarded Bitcoin as “digital gold” and believed that it ran counter-cyclically with the US dollar. However, it now appears that Bitcoin is more like an "amplifier" for Nasdaq. Compared to traditional stocks and bonds, these new institutional investors find Bitcoin lacks fundamental analysis (financial indicators and cash flow analysis). Its value is mainly determined by market supply and demand and investment trust. Therefore, commodity attributes and sentiment indicators have become the quantitative trends that institutional investors rely on. Coupled with the widespread use of leverage in the crypto market, Bitcoin is more volatile, which is a new market characteristic that we need to adapt to.

Compared with 7 interest rate hikes in 2022, the crypto market demand has significantly decreased

Taking the US market as an example, M2 (broad money supply) has been slowly declining since the first half of 2022. According to statistics from Macromicro.me, the seven Fed interest rate hikes from March to December 2022 caused the US market net liquidity index to show a rapid decline and has not increased since then. The U.S. interest rate hike policy in 2022 has had a significant impact on market liquidity, which has not maintained its previous growth. Subsequently, the encryption market demand has also decreased significantly.

Source: Fred

Source: MacroMicro

We choose stablecoins to take an in-depth look at the needs of the crypto market. Because the stablecoin issuance mechanism determines that its issuance can represent the market's demand for the crypto market. The overall market value of stablecoins has increased by approximately US$30 billion since 2024 (about half a year). Compared with the second half of 2021 and the first half of 2022, the growth rate has decreased significantly. What's more, the period from 2021 to the first half of 2022 happens to be a time of tight liquidity in the global financial market. This means that the crypto market has changed from a hedging risk market to a small boat in this vast ocean.

Pic: Stablecoin Total Market Cap
Source: DeFiLlama

From this, we can roughly conclude that the general style of the entire crypto market has changed from a nearly closed market that hedges financial risks to one that is economically sensitive A stronger market, and Bitcoin has also changed from "digital gold" to an "amplifier" of US stock markets such as Nasdaq. Economic indicators will affect the liquidity in the market and will also directly affect the crypto market.

This OTC is not that OTC, injecting liquidity into the market

Under the existing established macro policies, how do we solve the liquidity of the crypto market? There are two general methods: one is to promote the participation of institutional investors; the other is to improve market infrastructure. Here we focus on analyzing the first method.

In promoting the participation of institutional investors, over-the-counter trading (OTC) is an indispensable or currently ignored channel by the crypto market. Specifically, let’s take a single global Bitcoin currency as an example. According to CryptoQuant statistics, the daily balance of the OTC trading desk fluctuates between 100,000 and 500,000 BTC (calculated based on the BTC price of approximately US$65,000, which is approximately 6.5 billion to $32.5 billion). In comparison, the average daily inflow of Bitcoin ETFs is approximately US$122 million (Farside Invest data, as of July 5, UTC+8), which is equivalent to dozens to hundreds of times over-the-counter transactions. many.

Source: CryptoQuant

The OTC that everyone is already familiar with in the encryption market is slightly different. The OTC that we are familiar with refers more to the bridge between legal currency and cryptocurrency. This is due to the Before the emergence of compliance channels such as ETFs, OTC channels were the main channels accessible to the public. However, From a financial market perspective, the other two financial market functions of OTC - the main channel for large transactions and liquidity provision and market stability - need to be developed.

Source: OKG Research

In terms of institutional investors, RWA is another method that is often mentioned. But the author believes that RWA’s improvement in liquidity requires the real commitment to using crypto assets as a unit of account, and RWA should be issued on the public chain instead of being limited to alliance chains or private chains. Currently, RWA mainly remains in enterprise-level consortium chains or consortium chains between financial institutions. For example, Hedera, which cooperated with Blackrock in April this year, tokenized money market funds (MMF) and used incomplete decentralization. Blockchain solutions.

As the Web3 market continues to evolve, we can see its inherent changes. The crypto market has gradually transformed from a once safe-haven niche into a market that is highly sensitive to economic dynamics. Bitcoin has also transformed from "digital gold" into an "amplifier" for US stock markets such as Nasdaq. In response to the recent liquidity problems in the crypto market, we need to solve them in a multi-pronged manner. Not only must we adapt to the fluctuations of the macroeconomic cycle, we must also pay attention to and develop business areas that have been neglected in the past, thereby injecting new vitality and improving the stability and maturity of the market.

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