21 Aug, 23

Weekly Crypto Market Wrap, 21st August 2023

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Week in Review

Winners & Losers

Data source: TradingView

Market Highlights

  • The cryptocurrency market experienced significant turbulence this week, with Bitcoin’s price dropping to its lowest level since mid-June 2022, falling below $26,000 on Friday. The decline, at -11% WoW, is the worst return since last November’s crash to $15,000. The fuel was excessive leverage in the system and all-time lows in options volatility, the ignition was sparked by SpaceX reportedly writing off its Bitcoin holdings. Ethereum, which also plummeted heavily, rebounded strongly on Friday after news emerged that the SEC is poised to approve Ether futures ETFs in the US. The $25,000 level for BTC remains a crucial level to maintain, as the market is again tentatively waiting for a catalyst to dictate direction after a significant wipeout of leverage. The Grayscale case versus the SEC is reportedly nearing a conclusion, and the outcome could have a significant impact on upcoming spot ETF filings due early September.

  • Friday’s decline marked the highest single day of liquidations since the Luna crash in June 2022, with $1 billion in liquidations reported across all major derivatives exchanges, exacerbated by broader macroeconomic concerns, including fears over the Chinese economy and rising bond yields, which may compound digital asset woes in the near term.

Data Source: Velo Data – BTC Liquidations

  • Leading up to Friday, volatility selling strategies were preferred over prior months, resulting in volatility having been traded at all-time lows. The lack of a defining price catalyst had affected IV but also caused an evenly weighted build in open interest in derivatives markets, with price constrained within the 29-31k range for several weeks. This ultimately contributed to the sheer velocity of the price fall, and as a result, we saw the open interest across derivatives venues fall by a third, reflecting a significant wipeout of leverage across the space.

Data Source: Velo Data – BTC Open Interest

  • One intriguing discrepancy during Friday’s sell-off occurred on Deribit, the leading options exchange in crypto. In previous months, we’ve seen a consistent inflow of capital into BTC CME futures contracts, largely spurred by the continuing transformation of the ETF narrative. As a result, front and quarterly futures contracts on CME began to trade at a premium compared to crypto venues like Deribit. Recent COT reports from CME indicate that a large portion of short interest consisted of ‘hedge funds’ and proprietary trading firms, likely aiming to arbitrage the difference between native venues and CME.
  • On Friday, long futures (and short volatility) positions began to unravel, with the quarterly futures contracts trading much lower than spot, and eventually at enormous discounts to the underlying spot level as liquidations began to occur. Based on order book and trade flow, it seems that Deribit’s liquidation engine began liquidating a number of large positions (and accounts) particularly concentrated in December’s expiry, which contributed a $2,500 discount on a contract that typically trades at a premium to spot. The perpetual futures contract was also impacted, trading at a large discount with the 8-hour funding recording a -547.5% APY charge to hold short positions on the contract. The liquidations in total reflected the second largest liquidation event in history on Deribit. 
  • In the midst of the chaos, a separate liquidation was being handled through DeFi protocol Venus, which is built atop the BNB Chain. Following the massive $560 million hack on the Binance Smart Chain (BSC) bridge in October 2022, the perpetrator deposited 900,000 BNB worth $200 million in the Venus lending protocol as collateral, borrowing $150 million in stablecoins. To mitigate the risks present with liquidation in such a large position, the Venus DAO decided to whitelist BNB Chain as the sole liquidator for the hacker’s address in case of a margin call. Recently, with the crypto market tumbling along with BNB’s token price, the team manually liquidated the position and Binance took over the position. This event marks the second high-value on-chain liquidation to be brought to the spotlight since CRV only weeks ago. 

What to Watch 

  • BRICS summit, from Tuesday till Thursday.
  • French, German, UK and US Flash Manufacturing, on Wednesday.
  • Jackson Hole, from Thursday till Saturday.

Research Lab

In partnership with Pairwyse Protocol, Research Lab’s Beau Chaseling, Finn Judell, and Nathan Lenga present an extremely thorough piece on blockchain technology, focusing on the challenges of DAO-based smart contracts. Unveiling the Pairwyse Protocol, the researchers explore the centralisation paradox and introduce a novel on-chain solution, providing an essential contribution to the understanding of DAO governance.

* Index used:

  Bitcoin    EthereumGoldEquities        High Yield Corporate Bonds      CommoditiesTreasury Yields
BTCETHPAXG        S&P 500, ASX 200, VT      HYG  SPGSCIU.S. 10Y

FAQs

1. What Were the Major Events in the Cryptocurrency Market for the Week of August 21st, 2023?

Answer: Key events included Coinbase winning NFA approval for Bitcoin and Ethereum futures, SpaceX allegedly selling Bitcoin holdings, FTX’s Sam Bankman Fried’s arrest, PayPal’s rollout of a cryptocurrency hub, Binance Connect’s shutdown, SEC’s delay in Bitcoin ETF approval, Tether discontinuing Bitcoin-based stablecoin, Evergrande filing for US bankruptcy protection, and significant market turbulence with Bitcoin’s price dropping below $26,000.

2. What Were the Market Highlights and Key Data Points for Bitcoin and Ethereum During the Week?

Answer: Bitcoin’s price fell to its lowest level since mid-June 2022, dropping below $26,000, marking an 11% decline week-over-week. Ethereum rebounded strongly after news emerged that the SEC is poised to approve Ether futures ETFs in the US. The week also saw the highest single day of liquidations since June 2022, with $1 billion in liquidations reported across major derivatives exchanges, and a significant wipeout of leverage in the market.

3. How Did the Broader Macroeconomic Factors Influence the Cryptocurrency Market During the Week?

Answer: The cryptocurrency market was affected by broader macroeconomic concerns, including fears over the Chinese economy and rising bond yields. The decline in Bitcoin’s price was fueled by excessive leverage and all-time lows in options volatility, with SpaceX reportedly writing off its Bitcoin holdings as the ignition. The market was also influenced by events like Evergrande’s bankruptcy protection filing and the Federal Reserve’s stance on inflation and rate hikes.

4. What Were the Notable Liquidation Events and Derivative Market Activities in the Crypto Space?

Answer: The week marked the second-largest liquidation event in history on Deribit, with significant discrepancies in futures contracts trading. A separate liquidation was handled through DeFi protocol Venus, involving the massive $560 million hack on the Binance Smart Chain (BSC) bridge in October 2022. The manual liquidation of the position and Binance taking over marked the second high-value on-chain liquidation spotlighted since CRV only weeks ago.

5. What Are the Key Watch Items and Upcoming Events That Could Impact the Cryptocurrency Market?

Answer: Key watch items include the BRICS summit, manufacturing data from France, Germany, UK, and the US, and the Jackson Hole event. Additionally, the outcome of the Grayscale case versus the SEC, which is reportedly nearing a conclusion, could have a significant impact on upcoming spot ETF filings due early September. The market is also closely watching the $25,000 level for BTC, as it remains a crucial level to maintain.

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