Seasonal Weakness Lingers Over Crypto, Spot Bitcoin ETP Outlook

Jim Ferraioli (0:12)

Welcome back to Crypto Corner, here on the Schwab Network. I'm Jim Ferraioli.

Historically, September has been seasonally the weakest month of crypto for crypto returns on average. However, investors that are positioning for the seasonal weakness might find themselves offside following last month's short squeeze, which may have acted as a clearing event for negative sentiment. At the time, futures positioning was temporarily offside, and sentiment was overly negative based on perpetual future funding rates and the fear and greed index. Since then, the crypto market appears to have balanced itself in terms of sentiment and futures positioning.

Throughout this rally, open interest actually rose 16% alongside a 26% price move. The reason we think this is important is because this wasn't simply a short squeeze where shorts were getting liquidated and contracts were being closed out as a result. That would reduce open interest. Instead, what we've seen is an expansion of open interest. Rising open interest alongside rising prices has historically skewed bullish for forward returns according to data from Glassnode. This expansion in leverage has been accompanied by strong net inflows into spot ETP products as well. And so it's important to note that leverage can cut both ways. And when you get high open interest, that can put you at risk of a sharp liquidation-driven sell-off. And so we do watch some things for the downside too, but ultimately we feel positioning has reset and the setup appears less fragile than it did a month ago, though it also reflects less downside fragility. And so we're not necessarily taking a directional view, but we do think that this reset and really the crypto market structure around the future space is broadly supportive here. And what really supports this or confirms it is spot exchange rate of products. They've continued to record net inflows while Bitcoin's average cost basis remains near $80,000. We measure that using the ETP cost basis, which is about $83,000 today, and the active investor cost basis, which is around $76,000.

So as a reminder, the active investor cost basis is calculated using the cost basis for anyone who's acquired Bitcoin in secondary markets. So it doesn't include direct transfers or rewards to miners. And so the crypto market could see upside if prices breach these levels, because it would mean that the average Bitcoin investor has moved back into profit. And that's a threshold that's historically influenced sentiment. And so again, as prices rise, sentiment tends to rise. And so that means that a failure to hold these levels could actually leave the average investor still underwater, which could weigh on sentiment.

Why we think this is important is going back to seasonality. So September's seasonally the worst month, going back to 2011 On average, Bitcoin's fallen about 4% each year in the month of September.

While we did have a sentiment reset and some leverage reset recently, historically October and November have been very strong months for cryptocurrencies. And so if you do continue to see a rise in prices and the average investor becomes profitable again, that could actually put a year-end rally into play if October and November seasonality were to repeat. So that's going to wrap up this edition of Crypto Corner. Subscribe to the Schwab Network YouTube channel for weekly episodes.