Institutional Interest in the Crypto Sector Remains High, Coinbase Report

Institutional interest in the crypto space remains elevated given the high level of leveraged short positions in Chicago Mercantile Exchange (CME) Bitcoin futures, Coinbase said in a report last week.

CME Bitcoin futures climbed to a record high of 19,917 contracts on March 19, according to data from CFTC. That compares to total open interest on CME Bitcoin futures of 34,087 contracts or $10.5 billion on March 20.

Total OI on CME Bitcoin futures. Source: CME Group

Coinbase noted that most institutions that don't have direct exposure to cryptocurrencies "often use this spread to gain long Bitcoin exposure."

Coinbase said,

"Interestingly, the basis (30 days) between Bitcoin spot and CME futures has averaged around 16% annualized in March, only up slightly from the 14% average in February, but inside the margins of profitability for many market players despite the capital requirements for this trade."

Leveraged shorts on CME Bitcoin futures

The report notes that wirehouses such as Morgan Stanley (MS), Bank of America (BAC), UBS (UBS) and Goldman Sachs (GS) are "not the only gatekeepers of wealth," and some major U.S. wealth-management platforms operate outside of these large financial institutions.

Total value locked in on-chain derivatives at all-time highs

Another positive sign for the crypto market noted by Coinbase is the total value locked (TVL) in on-chain derivatives, which has reached an all-time high of $3.4 billion, even as the broader decentralized finance (DeFi) TVL remains about 50% off its previous cycle highs.

This is a result of low-cost block space and increased availability of high-throughput emerging from a heavy focus on infrastructure development during the bear market that has led to the building of new on-chain products.

"This is particularly noteworthy considering the collateral deposited into these protocols are typically constrained to major L1 tokens and stablecoins."

TVL in on-chain derivatives protocol. Source: DefiLlama

Coinbase said,

"We think TVL growth is a clearer symbol of sticky early-stage interest in protocols, though volumes and revenues will ultimately determine a protocol's longer-term success."

Bitcoin halving remains a significant supply-side event for Q2

The Coinbase report also highlighted the upcoming Bitcoin supply halving, saying it is setting up the crypto market for a positive second quarter with most of the previously identified headwinds in the rear-view mirror.

The Bitcoin reward halving, expected April 16-20, remains the main supply-side event, the report said. The halving happens every four years and refers to when miner rewards are slashed by 50%, thereby reducing the growth rate in Bitcoin supply. After the upcoming event, Bitcoin miner rewards are expected to reduce from 6.25 BTC to 3.125 BTC.

"On the demand side, the 90-day review period that many wirehouses employ when conducting due diligence on new financial offerings – like spot bitcoin ETFs – could conclude as early as April 10," Coinbase analysts David Han and David Duong wrote..

From a technical perspective, the upside remains intact for the crypto market. The total crypto market has formed a bull flag on the weekly chart. A weekly candlestick close above the upper limit of the flag at $2.61 trillion would confirm a bullish breakout toward the target of the chart pattern at $4 trillion. This would represent a 53% uptick from the current price.

Total crypto market cap, USD. Source: TradingView

The relative strength index (RSI) was moving within the overbought region and the price strength at 73 showed that buyers were still strong.

The lower limit of the flag at $2.34 trillion could be where the downside is capped for the total crypto market in the short term.