Monthly cryptocurrency market report: New year, new records

An overview of crypto market developments and performance in January

Key takeaways

• The first month of 2021 witnessed Bitcoin (BTC) and Ether (ETH) setting new all-time highs and the cryptocurrency market capitalization surpassing $1 trillion.
• Stimulus expectations rose after the Democrat victory in the U.S. election. With vaccinations on the rise, the economy is well on its way to a V-shaped recovery, especially as the Fed continues to provide support. 
• Bitcoin largely outperformed global assets in January and showed a greater correlation with risk-on assets. The market leader also drew increasing institutional interest. 
• There was considerable volatility in January due to active trading, which resulted in a record $717 billion total trading volume on OKEx for the month. 
• Altcoins outperformed Bitcoin's 14% monthly return, with a meme coin, DOGE, benefiting from the Wall Street Bets saga. 
• Ether performed due to solid fundamentals and reaped a 78% monthly return. DeFi tokens also soared as the market appeared to be repricing them with higher valuations.

Macro environment recap

The U.S. dollar supply has been marching northward ever since the epidemic began. The Federal Reserve is committed to continue bond purchases, and short-term borrowing rates remained anchored near zero in January. Markets believe that as long as the Fed maintains its current stance, it is safe to continue investing. As a result, global asset prices have benefitted from the generous money supply. 

With vaccinations on the rise, the U.S. economy is likely to end up with a V-shaped recovery. A precursor to such a recovery was the U.S. Dollar Index posting a counter-trend rally in January, up 0.7%. While the dollar rally had pressured risky assets in January, a subsequent stimulus package by the Biden administration is likely to limit the dollar's upside.

Meanwhile, the treasury yield has grown to 1.10%, levels not seen since the crash last March. The steepening curve is a signal that investors expect higher inflation in the coming years. This inflation expectation and the overly abundant capital in the market has set a great stage for Bitcoin. 

Moreover, the Wall Street Bets movement brought general instability to the market at the end of January, with stocks falling and the Volatility Index pumping 60% on Jan. 27. Gamestop and AMC pulled back by the end of January, though, and it seems that the WSB saga is coming to an end.

Historically, Bitcoin performs better during periods of declining market volatility. However, the popularity of the anti-establishment narrative on social media is driving more attention to Bitcoin and decentralized finance.

Global asset performances

From a yield perspective, Bitcoin outperformed global assets in January with a monthly return of 14.2%, as per the OKEx BTC spot price. The TWI crude oil spot price jumped 7.5% amid the economic recovery, ranking second. Gold spot suffered a sell-off due to increased market risk appetite, falling 2.7% on the month.

The stock market saw a divergent performance in January, with the S&P 500 Index ending 1% lower due to blue chips falling amid the WSB saga while emerging market equities posted positive returns. Strong returns from Greater China contributed to the outstanding 4.1% monthly return of the MSCI Asia ex-Japan Index, meanwhile, the MSCI Emerging Markets Index rose 3.1%. 

Institutional interest in Bitcoin continues to grow as the digital currency sets new records. MicroStrategy once again made a major investment into the foremost cryptocurrency and brought the firm's total BTC investment up to more than 70,000 coins. Crypto miner Marathon Patent Group bought $150 million in Bitcoin during the price dip in the middle of January and there is an evident trend of companies building Bitcoin treasuries. 

Even Ray Dalio, the founder of Bridgewater Associates, changed his attitude toward cryptocurrency and said Bitcoin is "one hell of an invention." He's also considering cryptocurrencies as investments to protect clients against fiat currency debasement. 

It is also worth noting that Bitcoin's 90-day correlation with the S&P 500 Index rebounded in January, rising from 0.1 levels to as high as 0.21. On multiple trading days, Bitcoin saw synchronized moves with the stock market around the U.S. stock market open time. 

Bitcoin's correlation with gold, on the other hand, decreased from 0.07 to -0.07. This suggests that, at this stage, Bitcoin is seen more as an alternative risk asset than a safe-haven asset.

January's trading sentiment on OKEx

In the first half of January, as Bitcoin's price jumped from $30,000 to over $40,000, the market sentiment became overheated. The premium on quarterly futures climbed from 3% to 6%, and eight-hour funding rates on perpetual swaps repeatedly spiked to as high as 0.15% on OKEx. 

Bitcoin experienced two major retracements within the first half of January. The 21% retracement on Jan. 3 was quickly picked up by frenzied buying power, and the price continued its upward move, setting a new all-time high near $42,000. The second retracement around Jan. 11 was in tandem with the decline in other risk assets due to rising yields in treasury notes and the dollar index. This drop saw Bitcoin losing 28% of its value across three days, and market participants were wondering if a bear market had arrived. 

The second retracement also contributed to the overall subdued market sentiment in the second half of January. Quarterly futures premium fell back below 2%; meanwhile, both the long/short ratio and open interest dropped quickly. 

Just as the market was turning pessimistic, Elon Musk updated his Twitter bio with the word #Bitcoin on Jan. 29. The leading cryptocurrency immediately pulled up 20% in response. This also served as the last highlight in January before Bitcoin gave back most of the "Elon rally" gains. 

A market filled with new highs and sharp retracements allowed the trading volume to reach record levels in January. OKEx generated $717 billion in total volume, with futures accounting for 55% of it. Additionally, the most traded instrument on OKEx, the coin-margined BTC quarterly future, set the highest single-day volume in history, at $7.2 billion on Jan. 11. Other instruments also saw volume spikes on the same day. Moreover, BTC open interest on OKEx set a new all-time high of $2.42 billion on Jan. 19 before sharply falling back to below $2 billion levels, as bulls began closing their positions for profit-taking. 

Altcoins outperformed BTC

The altcoin-season index provided by Blockchain Center surged from 14 to 57. This shows that by the end of January, 57% of the top 50 cryptocurrencies performed better than Bitcoin compared to the last 90 days.

An important phenomenon in January was an outburst of anti-establishment sentiment — led by Wall Street Bets — that shook the cryptocurrency market. Dogecoin (DOGE) jumped more than 1,000% in just over a day after the WSB crowd supposedly pumped the meme coin. The coin continued trending as Elon Musk also mentioned it a couple of times on Twitter, and that took it to the top spot among the nine most traded cryptocurrencies by OKEx spot volume.

XRP and Stellar's Lumen (XLM) were also favored by the Redditors. The WSB-led pump enabled XRP to reap a 122% gain in January. Before this, XRP was facing high selling pressure due to a lawsuit filed against it by the U.S. SEC. Meanwhile, XLM surged 148%. 

Polkadot (DOT) saw a rapid price jump in the second half of January due to the upcoming slots auctions. These events clearly boosted demand for DOT in the short term, and it ended the month with a 93% return. 

Given the impact of external factors, DOGE price detached from Bitcoin in January, with a correlation factor of less than 0.25. Similarly, XRP and XLM did not have a correlation of more than 0.5 with any other cryptocurrencies listed above. 

Ether shows strong fundamentals

Three years after the ICO boom, Ether once again hit a new all-time high above $1,400 in January, realizing a 78% monthly return. Ether's volatility has historically been higher than Bitcoin's, and this did not change in January. Both market leaders saw volatility rise to mid-April highs. However, in January, Ether retraced much less than Bitcoin, and its rally was more sustainable. This was reflected in the fact that ETH's 30-day return on investment did not drop too much by the end of the month. 

As of Jan. 31, the total value locked in the Ethereum network reached $28 billion, up 80% compared to the previous month, as per data by DeFi Pulse. As the DeFi market continues to boom, the demand for Ether increases in tandem. 

The key metric for measuring the use of cryptocurrencies are total transaction fees, which reflect real demand from paying users. While Bitcoin's total transaction fees (30-day rolling average) were five times higher than Ether's in January 2018, this situation was completely reversed in January this year, with Ether's total transaction fees of $10.7 million being three times higher than Bitcoin's.

The only concern, however, is that Ether's active address count did not rise as fast as Bitcoin's in January, which may be a result of high gas fees deterring retail investors with small funds.

DeFi continues to trend

Many leading DeFi tokens hit their highest prices during January, as the market repriced them with higher valuations based on solid fundamentals. Another reason behind this rally was that the U.S. Office of the Comptroller of the Currency published an article discussing "self-driving banks" built on DeFi protocols. 

Among OKEx listed DeFi tokens, native tokens of decentralized exchanges were undoubtedly the biggest winners in January. Among them, Curve (CRV) and Tokenlon (LON) topped the sector, with returns of around 320% each. Lending protocol token AAVE and synthetic asset protocol Synthetix (SNX) also realized a monthly 245% and 138% return, respectively. 

According to Dune Analytics, Uniswap topped the decentralized exchanges with a monthly trading volume of $25.9 billion, followed by SushiSwap at $12.2 billion. Curve ranked third with a volume of $6.3 billion. 

The growth curve of total DeFi users continued to be steep, growing from 1.18 million to 1.32 million over the month. Permissionless and trustless DeFi protocols may see accelerated adoption since platforms like Robinhood repeatedly stopped normal trading activities in January. In fact, a paradigm shift in the financial industry may already be underway.

Looking ahead

Data shows that February has historically been a strong month for Bitcoin, with the second-highest median of 21% and an average of 17% monthly returns. News of Tesla's purchase of $1.5 billion worth of Bitcoin had set the market on fire in early February, and the price had entered uncharted territory. Traders, however, need to keep an eye on whether profit-taking could cause a decline, as it did at the end of January. That being said, the long-term positive sentiments around Bitcoin are likely to remain intact. 

A couple of rapid pullbacks in January caused weak hands to dump their coins, while investors who are long-term bullish continued to buy. This is reflected by the growing number of addresses with balances over 1,000 BTC, despite the retracements. According to Glassnode's data, 201 new whales have appeared on the chart over the month, a sign that institutions and big firms may be starting to accumulate coins. The purchase made by Tesla could have a signaling effect, and its rumored cost of around $33,000 per coin will likely create a price floor. 

Miners were dumping their holdings in January. The Miners' Position Index (MPI) started off around 1.256, and it spiked to a historical high of 12.666 on Jan. 17. By the end of January, this index was back to 2.79. Since miners have unlocked such a big amount of coins in January, the supply could be drained in the short term. 

In addition, institutional exposure has opened up with the launch of ETH futures on CME in early February. A recent report from CoinShares shows that capital inflows to ETH have been highly concentrated over the past weeks. Notably, the Federal Reserve Bank of St. Louis published a DeFi research report, exploring smart contract-based financial markets. All of these lead us to believe that the market sentiment is optimistic about ETH. 

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