Retail investors play role in recent market surge as funding rates surge and number of addresses rise

The cryptocurrency market has rebounded since the turn of the year, gradually erasing memories of a gruesome winter that engulfed the market last year. The total market capitalization has increased by over 40% in 2023, with many top cryptocurrencies seeing gains within a similar range.

However, a major cause of concern for investors is whether the current market conditions mark the beginning of a new bullish run for cryptocurrencies or is simply a bearish trap that could lead to severe losses as the year wears on. Anticipations of a global recession, the aftermath of the recent FTX collapse, and a pending U.S. fiscal policy decision are some of the factors still clouding a largely positive market performance.

This release of the Adaptive Analysis Newsletter provides insights into the factors driving the market recovery. Readers will learn how a combination of retail and institutional demand has impacted market performance positively. We also review new macro-risks that could impede the market rebound, shedding light on why most investors are less optimistic that crypto is primed for a full-scale recovery.

Retail appetite drives market recovery

The cryptocurrency market hit its current bottom in November, following the seismic demise of the previous third-largest cryptocurrency exchange FTX. Before the FTX collapse, the crypto industry had weathered other harsh market dynamics. These included macro-headwinds, the collapse of the $40 billion Terra ecosystem, hacks to the tune of hundreds of millions of dollars, and the implosion of several centralized lending platforms.

However, several on-chain metrics reveal that retail cryptocurrency investors grew in numbers despite the market turmoil. For instance, data compiled by Coingecko shows that the number of Bitcoin and Ethereum addresses with a balance of at least $1000 grew by approximately 28% in the past year. Some of this figure can likely be accounted for by BTC and ETH owners distributing their wealth among a greater number of addresses as a risk management strategy but the growth is nonetheless a positive development.

The number of Bitcoin addresses holding >= 0.1 BTC increased from 3.40 million to 4.20 million between January 1 and December 31, 2022. Similarly, addresses holding at least >= 1 ETH increased from 1.41 million to 1.73 million within the period..

(Source: CoinGecko)

A report from estimated ownership from their data. They estimated that global crypto users rose by 39%, jumping from 306 million to 425 million by the end of 2022. Bitcoin and Ethereum saw the most substantial growth, with the number of users increasing by 20% and 263%, respectively.

Retail investors have also played a key role in the market recovery we have been observing in 2023.This is evidenced by the BTC perpetual contracts funding rates on offshore derivatives markets such as Binance, BitMEX, and Bybit flipping positive, a key indicator of retail buying outweighing retail selling.

(Source: Coinglass)

Is crypto primed for a full market recovery?

Declining inflation in the United States and a potential pivot in fiscal policy by the Federal Reserve have positively impacted risk-on assets, including stocks and cryptocurrencies. Yet, experienced investors are cautious of negative macro-risks that could negatively impact crypto in the coming months.

The World Bank has increasingly warned of a global recession as the world continues to grapple with the effects of supply chain shocks, the energy crisis, and European political unrest. The United States is also on the cusp of a market-defining decision after its government breached the debt ceiling (or borrowing limit) at $31.4 trillion in the past week.

The debt ceiling refers to the maximum amount the U.S. government can borrow to finance its obligations, such as paying bondholders and employees. In a letter to Congress, Treasury Secretary Janet Yallen warned that "failure to meet the government’s obligations would cause irreparable harm to the US economy, the livelihoods of all Americans, and global financial stability.”

A decision on whether or not to increase the debt ceiling could define markets in 2023. Increasing the limit would represent a loose fiscal policy and could sustain the current market rally. On the other hand, a potential default or political deadlock on the debt ceiling decision could crash markets. In the meantime, the U.S. Treasury has adopted temporary measures to meet its financial obligations at least until June 2023, according to Yallen.

These global macro-risks inevitably continue to cap potential gains across traditional finance and crypto markets. However, January’s positive market returns are encouraging for long-term investors who must remain cautiously optimistic about the highly volatile macro environment.

Crypto market spotlight:

  • EU lawmakers approve law mandating banks to collateralize crypto investments: European Parliament’s Economics and Monetary Affairs Committee this week approved a law mandating banks to hold the equivalent in reserves of any amount they invest into digital assets.
  • Coinbase fined $3.5m by Dutch central bank: De Nederlandsche Bank (DNB), the central bank of the Netherlands, fined Coinbase $3.5 million for serving customers in the region before obtaining legal registration.
  • Tesla HODLs BTC amid market turbulence:  Tesla’s Q4 report reveals that the electric auto market did not sell its bitcoin holdings despite the market turbulence.
  • SEC declines ARK 21Shares Bitcoin ETF listing: The United States Securities and Exchange Commission (SEC) has once again declined a move to list an exchange-traded fund (ETF) tracking Bitcoin’s price.
  • Ethereum completes shadow fork ahead of ETH staking unlock: Core developers successfully executed a shadow fork for the widely anticipated Shangai upgrade, which will enable withdrawals for ETH locked on Ethereum’s PoS network.