Original title: Weekly: Chaotic CrossroadsAuthor: David Han (Institutional Research Analyst)
Release date: April 19, 2024
Key Points
The sharp drop after the intensification of Middle East conflict over the weekend and the continued decline have washed away a lot of leverage in the field, even as the Bitcoin halving approaches.
The BTC perpetual contract funding rate briefly turned negative for the first time since October 2023 and has remained near zero since then.
So far, the declines in 2024 BTC are the smallest so far, at 16% and 27%, respectively, even lower than the record levels in 2023. As a result, more room could be opened up to the downside, and traders have been positioning accordingly based on options and on-chain data.
Markets
With the halving approaching, leverage has been largely cleared out of the market. Bitcoin's sharp drop following the intensification of conflict in the Middle East over the weekend, coupled with continued lower movement over the past week, caused the BTC perpetual futures funding rate to briefly turn negative for the first time since October 2023. Since then, the funding rate has remained close to zero and has crossed the zero mark several times in recent days. We believe this may indicate some temporary short bias, but there is no large-scale panic effect. We believe that this directional uncertainty illustrates our view on Bitcoin's dual role as a risk-on asset and a safe-haven asset. While marginal sellers appear to be mainly reducing risk, strong buying has also occurred between $60,000 and $62,000.
However, this is not to say that the market does not have the potential to move further lower. 2023 has been the best year for cryptocurrencies from a maximum drawdown perspective, with peak drawdowns of 20% for BTC and 27.4% for ETH. Prior to this, the smallest maximum drawdowns for BTC were in 2016 at 31.3%, and for ETH in 2021 at 57% (see Table 1). The drawdowns so far in 2024 have been even smaller than in 2023, and given the elevated levels of realized volatility year-to-date, further downside is entirely possible.
Volatility has generally been declining for the asset class since its launch 15 years ago, although a local bottom in 3-month realized volatility was reached in October 2023 (see Figure 1). Since then, prices have steadily reversed upwards as volatility has increased. We believe that if we continue to have a hawkish risk-off environment, those who view Bitcoin as a risk-on asset may continue to sell until they reach equilibrium with the group that views Bitcoin as a safe-haven asset.
Indeed, short-term traders on Deribit appear to be anticipating further downside in the near term, so they are hedging the implied volatility premiums for options below the strike price. Interestingly, however, for longer-dated options expiring in June 2024 and beyond, these premiums are skewed to the upside. We believe this reflects broader cyclical sentiment, and we appear to be far from a cyclical peak, but there is risk of further downside in the near term.
On-chain leverage measurements also reflect this positioning. Stablecoin deposit rates on Aave have fallen by more than 50% from their peak in March, but are still above this year's lows in late January 2024. We believe this suggests that traders still retain some leverage (and are therefore constructive in the long run), but have reduced their position risk to some extent in order to take advantage of short-term downside.
Crypto and Traditional Finance Data
(as of 4pm EST on April 18)
Asset | Price | Mkt Cap | 24 hour change | 7 day change | BTC correlation |
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BTC | $63,470 | $1.25T | +3.46% | -9.59% | 100% |
ETH | $3,060 | $367B | +2.20% | -12.59% | 91% |
Gold (Spot) | $2,379 | - | +0.80% | +0.30% | 22% |
S&P 500 | 5,011 | - | -0.22% | -3.61% | 25% |
USDT | $1.00 | $109B | - | - | - |
USDC | $1.00 | $32.6B | - | - | - |
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Asset | MTD flow (US$B) | YTD flow US$B) | AUM (US$B) | Bitcoin held (BTC M) |
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Spot BTC ETFs (US) | $0.18B | $12.3B | $48.4B | 0.79M |
Source: Bloomberg
Coinbase Exchange and CES Insights
Volumes picked up over the weekend and remained high during the week. On Saturday and Sunday, traders focused on geopolitical uncertainty. That focus quickly shifted mid-week after Jerome Powell suggested that interest rates could remain higher for longer, giving the market another reason to sell. Together, these events were enough to clear most of the leverage in the market and bring funding rates close to zero for both BTC and ETH. While lower leverage is constructive for the market, we are entering a seasonally tough period and it remains to be seen whether prices can hold firm here. We are seeing near-parity in liquidity across majors and altcoins from trading desks.
Coinbase platform trading volume (USD)
Coinbase platform trading volume (asset ratio)
Funding rate
4/18/2024 | TradFi | CeFi | DeFi |
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Overnight | 5.35% | 5.00% - 10.75% | 6.22% |
USD - 1m | 5.50% | 5.25% - 11.00% |
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USD - 6m | 5.75% | 5.50% - 11.50% |
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BTC |
| 1.50% - 5.00% |
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ETH |
| 3.00% - 8.00% | 0.99% |
Notable Crypto News
Institutions
Web3 investments grew 55% in Q1 as Crypto VC interest rebounds (CoinTelegraph)
Hong Kong spot Bitcoin ETF could go live as early as this month (The Block)
Regulatory
Tether and Circle at odds over how to address global jurisdiction of stablecoin rules (Coindesk)
Regular
Runes will help Bitcoin DeFi close the gap with Ethereum and Solana (Decrypt)
Coinbase
Coinbase Derivatives has successfully launched Bitcoin Cash and Litecoin futures contracts and is preparing to launch Dogecoin futures later this month (Coinbase Blog)
Global
Europe
EU’s MiCA rules have implications for European Crypto, regulators say Market impact is small (Coindesk)
UK to enact new legislation on stablecoin and cryptocurrency staking, trading and custody by June or July this year (Coindesk)
Germany’s largest federal bank, Baden-Württemberg State Bank, plans to start working with Bitpanda exchange to provide cryptocurrency custody services (Bloomberg)
Barclays, Citigroup and other banks are testing tokenized deposits in the UK (Bloomberg)
Asia
Hong Kong approves first spot Bitcoin and Ethereum ETFs in drive to become cryptocurrency hub (The Block)
Hong Kong-based First Digital’s $3 billion stablecoin moves to Sui Network to boost its DeFi (Coindesk)
Australian central bank shows Australians don’t value privacy or security of retail CBDCs (Cointelegraph)
Vietnam has not banned cryptocurrencies, calls for legal framework, says official from Vietnam’s Ministry of Justice (VNExpress)
Big things to come in the week ahead
| April 22 | April 23 | April 24 | April 25 | April 26 |
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Notable Macro |
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BoJ Policy Rate | US PCE UoM Consumer Sentiment |
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Notable Earnings |
| Tesla Inc | Meta Platforms | Microsoft Corp Microsoft |
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Alphabet Inc |
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Crypto |
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US Crypto Futures Expiry |