How to monitor the movement of “smart money” in crypto on US election day

Written by: James Hunt Translated by: Vernacular Blockchain

Election Day in the United States has arrived, and the 24/7 trading characteristics of the cryptocurrency market have advantages over the trading hours of traditional markets. Kaiko's analysts outlined three key indicators to pay attention to as the election results are announced.

1. Transaction-by-Transaction Data

First, observing the transaction-by-transaction data on major platforms can provide insight into the movements of "smart money". By calculating the cumulative volume increment (CVD) on a transaction-by-transaction basis, the net buying and selling activity of global crypto trading platforms can be measured. Kaiko analyst Adam Morgan McCarthy said the indicator provided valuable insights during the presidential debate between Trump and Kamala Harris and is expected to be useful again during the election. During the September debate, CVD turned negative, indicating that the market reacted bearishly to Trump's performance, as Harris was seen as less friendly to the crypto industry in comparison, while Trump showed a clear pro-crypto stance.

CVD on Coinbase during the presidential debate. Image credit: Kaiko.

The analyst explained that by breaking down tick-by-tick transactions into buys and sells, it is possible to observe the strong selling pressure from the market's real-time reaction to Trump's performance. This helps to time the market, showing when buying and selling pressures are easing and providing clues to participants' expectations.

BTC buying and selling on Coinbase during the presidential debate. Image source: Kaiko.

2. Funding rate

According to Kaiko's analysis, the second indicator to pay attention to is the funding rate. Leveraged traders are very sensitive to sudden changes, which may cause squeezes or chain liquidations in the market, whether they are rising or falling.

Higher funding rates usually indicate increased speculation in Bitcoin perpetual contracts. In March, when Bitcoin broke through $73,000 to set a record high, the funding rate soared to more than 0.05%. However, McCarthy said that last week, when Bitcoin was close to the same level, funding rates remained around 0.01% on BN and Bybit, the two largest perpetual contract platforms, indicating that traders' confidence has declined before the election.

BN adjusts funding rates every eight hours, with the first adjustment at 12 noon ET and then at 8 pm after the East Coast polls close. The next adjustment will be at 4 am ET on Wednesday, when the election results may be clearer.

3. Implied Volatility

Finally, implied volatility (IV) is also a key indicator in the derivatives market, showing how participants price risk. IV is a forward-looking indicator that predicts the expected volatility of an asset over a given time frame. It aggregates multiple data points into a single number, allowing traders to judge whether options are relatively cheap or expensive.

Monitoring the IV term structure helps traders anticipate potential market risks. An inversion of the IV term structure, where the short-term IV is higher than the long-term IV, often signals an upcoming risk event, such as the U.S. election, Kaiko analyst explained.

Recently, Bitcoin’s rally to near record highs caused a spike in short-term IV, catching traders off guard and prompting them to adjust their positions. The change affected the IV smile – a pattern that shows higher implied volatility for options that are slightly higher or lower than the current price. A rightward tilt of the IV smile suggests that the market is expecting upward price volatility, while a leftward tilt suggests market concerns about potential price declines. The recent changes highlight how traders can hedge against expected price volatility, he added.

Bitcoin implied volatility before the US election. Image source: Kaiko.

Ultimately, the market is driven by supply and demand and is affected by the behavior of participants, but McCarthy pointed out that the accuracy of predicting these trends remains uncertain because traders are not invulnerable.

4. Prediction markets and polls diverge when the results are uncertain

Currently, Trump's probability of winning on the decentralized platform Polymarket is 62%, and Harris's is 38%. The platform's trading volume on the presidential election results has reached US$3.25 billion, making it the largest prediction market to date. On the regulated Kalshi platform, Trump's odds are 57% and Harris's are 43%. However, Bernstein analysts noted on Monday that the national poll average remains close, with Harris leading by 1%, within the margin of error.

Kaiko has previously noted that the level of open interest on Polymarket suggests the platform lacks sufficient liquidity to place bets on the US election and that its predictive power is controversial. Others have pointed out that prediction markets have had mixed performance in the election, that large players may distort the market, or that there may be potential bias due to the dominance of male, crypto-native and non-US traders on the platform, analysts at crypto trading firm and market maker GSR mentioned this week.

However, after the odds of the two candidates briefly converged over the weekend, Gautam Chugani, head of Bernstein's digital assets division, said: "For those who believe that Polymarket data is manipulated by Trump bias, we believe that the trading data over the weekend is enough to prove that it works like any open market and that traders are easily spooked by the incremental poll data."

In addition, supporters of the accuracy of prediction markets believe that the focus on voter polls rather than the Electoral College vote, as well as the use of retrospective polls in election models, are key factors. They also emphasize that the odds of most betting markets are similar to Polymarket, which indicates that there is little possibility of market manipulation. GSR also added that academic research shows that prediction markets are generally more accurate than surveys or expert opinions, and transparency, collective wisdom and market dynamics drive odds toward accuracy. Kaiko pointed out that Pennsylvania, North Carolina, Georgia, Michigan, Wisconsin, Arizona and Nevada are the key states of concern on election night, especially Pennsylvania. If Harris loses her 19 electoral votes, the path to the White House will become extremely difficult or even almost impossible according to some polls. Currently, on Polymarket, Trump leads in Arizona, Georgia, Nevada, North Carolina and Pennsylvania, while Harris leads in Wisconsin and Michigan.

5. Expected price impact of Bitcoin

Greg Magadini, head of derivatives at Amberdata, said in an interview with The Block that he expects the price of Bitcoin to fluctuate between $6,000 and $8,000 after the election. If Harris wins, it may fall to the $60,000 level; if Trump wins, it may break through $75,000 to set a new record high.

BRN analyst Valentin Fournier also agreed, predicting that the price fluctuation of Bitcoin after the election will be about 10%. If Trump wins, it is expected to have a positive impact; if Harris wins, there may be a price correction. "However, regardless of the election results, the medium- and long-term prospects for Bitcoin remain optimistic," Fournier pointed out.

On Monday, Bernstein analysts said they expect Bitcoin to reach $80,000 to $90,000 by the Jan. 20 presidential inauguration if Trump wins, but warned that if Harris wins, Bitcoin could fall to $50,000 in the same period before recovering.

According to The Block's Bitcoin price page, Bitcoin is currently trading at $68,828. It's down about 4% over the past week, but is up 63% this year.

Meanwhile, the GMCI 30 index, which represents the 30 largest cryptocurrencies, has fallen about 7% over the past seven days to 120.08, but is up about 21% in 2024.