As Bitcoin Price Hits 2023 High, Why Are Retail Traders Still Waiting?

The total cryptocurrency market capitalization soared to over $1.55 trillion on December 5, driven by Bitcoin's 14.5% weekly gain.

Despite the recent bullish momentum, analysts have observed that retail demand remains relatively stagnant . Given that interest rates continue to hover above 5.25%, some attribute this to the ripple effect of the inflationary environment and declining credit interest. While analyst Rajat Soni's post may exaggerate the situation, it is essentially correct.

Several U.S. economic indicators surged to record highs, including wages, salaries and household net worth. However, analyst Ed Yardeni said the "Christmas rally" may have already occurred earlier this year, with the S&P 500 up 8.9% in November.

The rise reflects waning inflationary pressures and strong employment data. However, investors remain cautious, with about $6 trillion of "idle money" parked in money market funds, waiting on the sidelines.

Are Retail Traders Missing Out on Bitcoin and Ethereum’s Recent Gains?

Since there are no reliable indicators to track retail participation in cryptocurrencies, a comprehensive data set is needed to draw conclusions, rather than just relying on Google Trends and crypto-related app download rankings. In order to determine whether retail traders missed the rally, it is important that the indicators from various sources are consistent.

USDT peer-to-peer with USD/CNY. Source: OKX

On December 5, USDT's premium to the RMB reached 1%, a slight improvement from the previous weeks. However, it is still in a neutral range and has not broken the 2% threshold for more than half a year. Regardless of whether retail investors flow to Bitcoin or altcoins, Chinese investors mainly need to convert cash into digital assets.

Turning our attention to Google Trends, searches for “buy bitcoin” and “buy crypto” have shown a steady pattern over the past three weeks. While there is no clear answer as to what sparks the interest of new retail traders, these queries often revolve around how and where to buy cryptocurrencies.

Search trend index, weekly. Source: Google Trends

It is worth noting that the current 90-day index is around 50%, showing no signs of improvement in the near term. This data seems counterintuitive given that Bitcoin has surged 53% in the past 50 days, while the S&P 500 has risen 4.5% in the same period. Importantly, looking at a longer time frame, current search levels are still 90% below the all-time high in 2021.

Finally, it is crucial to delve deeper into the derivatives market, specifically perpetual futures, which are the preferred instrument for retail traders. Also known as inverse swaps, these contracts have an embedded interest rate that accumulates every eight hours. A positive funding rate indicates a greater demand for leverage from longs (buyers), while a negative rate indicates that shorts (sellers) are seeking additional leverage.

Perpetual futures weekly funding rate. Source: Coinglass

Note that the weekly funding rate for most tokens fluctuates between 0.2% and 0.4%, indicating slightly higher demand for leverage from longs. However, during bullish periods, this metric can easily exceed 4.3%, which is not currently the case for any of the top seven tokens by futures open interest.

At present, the influx of retail participants in this cycle remains elusive, especially for new entrants that have shown excessive optimism. While some analysts point to the trend of the Coinbase app, it must be considered that Binance is currently under scrutiny from regulators and its founder Changpeng Zhao faces potential legal issues. Therefore, existing retail traders may have migrated from offshore exchanges to Coinbase, rather than heralding the arrival of a new wave of cryptocurrency enthusiasts.