Bitcoin risk-reward calculation is being upended by rising rates
A funny thing happened to Bitcoin as interest rates started to rise: trading volumes went way down. Now market-watchers are grappling with the implications and what a world of less-loose monetary policy means for digital assets.
The aggregate 30-day moving-average volume for Bitcoin across Coinbase, Bitfinex, Kraken and Bitstamp is at its lowest level since August 2021, according to data compiled by Strahinja Savic at FRNT Financial. Over the last month, the aggregate daily volume on those venues has averaged just over $1 billion. That reading stood at $2.57 billion in May 2021, a nearly 60% decline.
That’s happened as the Federal Reserve and other central banks accelerate their fight against inflation, which has remained hotter for longer than many had expected it would. With rates rising and the cost of money no longer hovering around zero, crypto prices have flagged, prompting investors to recalculate their desires to be invested in the cutting-edge market.
For one, the withdrawal of liquidity impacts volumes in crypto -- and elsewhere -- by reducing the funds available to invest, says Noelle Acheson, head of market insights at Genesis Global Trading. Second, higher rates increase the opportunity cost of investing in non-yielding assets such as Bitcoin. And those buying the coin using leverage could feel an extra pinch: higher borrowing costs alter the risk-reward scenario of such trades, meaning that your potential return drops as your costs go up.
“Volumes are down because of the uncertainty,” she said. “Investors seem to be worried that things could get worse before they get better.”
Acheson notes that the percentage of Bitcoin that has not moved for over a year is at an all-time high, with roughly 76% of the coin
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