Crypto Assets Correct Sharply As Geopolitical And Macro Risks Return and Leveraged Traders Record Heavy Losses
It has been a brutal week for crypto assets after a massive decline over the weekend occurred following the attack on Israel by Iranian suicide drones and ballistic missiles. While the attack generated little damage and had little immediate impact on crypto in general, the event became the catalyst for a large decline in crypto assets. Altcoins took the brunt of the selling with a massive deleveraging event that whipped out 10 billion (or 50%) of total altcoin open interest, which resulted in $850 million in liquidations over the weekend.
Figure 1. Open interest for all assets, excluding BTC and ETH, fell by $10B.
During this weekend's alt-massacre, bitcoin fell from approximately $70K back to around $60K, which is the bottom of the range that bitcoin’s price has been consolidating in since the start of March. This shift in momentum is likely due to a slowdown in positive ETF flows over the last few weeks. Grayscale’s high-fee ETF, GBTC, continues to see daily outflows, while other issuers have started to see net outflows hit their products for the first time. The only exception has been Blackrocks ETF, which has yet to see a single day of outflows since launch.
Figure 2. Bitcoin is testing the bottom of its trading range after this weekend’s sell-off.
A more recent source of sell pressure had come from Binance. Today, the largest crypto exchange announced that it had sold all of the Bitcoin it held in its Secure Asset Fund for Users Emergency Fund, which was worth ~$1B. Binance, like many other crypto exchanges, has been taking portions of its revenue and buying bitcoin since 2018 to hold as an insurance fund in the event of a hack and loss of users' funds. The firm announced that it had swapped its stack of bitcoin in exchange for USDC, Circle’s stablecoin. Many speculate that this move was likely at the request of US regulators who had entered into a settlement agreement with Binance last November.
This recent sharp decline has come just as the Bitcoin protocol is about to have its fourth halving event, where approximately every four years, the protocol programmatically cuts its issuance rate by half. This event has historically marked the early stages of a broader bitcoin uptrend. It seems likely that this event, which has become increasingly familiar to a growing mainstream audience, has largely been priced in. Bitcoin’s price has seen rapid appreciation thanks to the launch of the ETFs, which could make this halving event rather uneventful. Nonetheless, a cut in issuance, which leaves less bitcoin for miners to sell, will in the medium and long term, be undeniably structurally bullish for the asset.
Figure 3. Bitcoin’s issuance rate is about to see its fourth halving (Source).
Although Bitcoin has had a difficult time over the past several days, altcoins have suffered much larger declines. Solana, for example, peaked at around $205 on April 1st and proceeded to fall all the way to approximately $115 during the liquidation event over the weekend. We flagged the fact that there appeared to be fading momentum in the price action of several altcoins a few weeks back and, unfortunately for Solana holders, the sell-off was quite severe once prices began to accelerate to the downside.
Figure 4. Solana suffered a significant drawdown this month.
While the recent market downturn can be jarring, it is a common occurrence during bull markets and aligns with patterns observed in previous cycles. Such corrections often coincide with frenzied trading in the latest memecoin, NFT, or ICO token, coupled with high levels of leverage, typically signalling an overextension that needs correction. This could provide an opportunity for long-term investors to allocate to crypto assets at discounted prices.
A good indication of sentiment can be gauged from the 25-Delta Skew in the options market. Delta skew specifically looks at the difference in the delta between similar call and put options and can show the ‘richnes’ of either puts or calls in terms of implied volatility. A large positive spike in the Delta Skew suggests the market is hedging or outright betting on further downside, suggesting many market participants are ‘fearful’. These large spikes have historically been a reliable indication that a local bottom is near.
Figure 5. Bitcoin option’s 25-Delta Skew from Velo Data.
Another welcoming indicator for the bulls is the drop in the annualized basis on the 3-month futures contract, which has fallen from its highs of ~25% to sub-10%. This signals that the derivative market has seen another rapid cooldown after last weekend's deleveraging. As prices correct, helping to wash away excesses and as sentiment turns fearful, the levered long positions have become much less crowded.
Figure 6. 3-month basis on Bitcoin futures from Velo Data.
One major development over the past week has been the enforcement notice that UniSwap, one of the largest decentralized exchanges in the world, received from the SEC late last week. This development pushed the price of the UNI token down on Friday and is yet another data-point in the seemingly relentless campaign that the SEC has embarked upon to challenge the crypto industry at every step. UniSwap, for its part, has declared its intention to valiantly combat the SEC in court, with its CEO Hayden Adams stating that his organization is “ready to fight” in a lengthy tweet that we have captured just a short excerpt from (Image 1).
Image 1. Haden Adams, the CEO of Uniswap, tweets about the Wells notice his organization received from the SEC.
Figure 7. UniSwap’s token, UNI, suffered a 20% drop on Friday following the news of the SEC’s actions against the organization.
This week is a good reminder that crypto volatility works both ways and that glorious gains can quickly be given back to the market if momentum shifts rapidly. This is especially true when the market appears to be on “easy mode” with steady gains being achieved on a consistent basis. The froth and leverage tends to build up to a boiling point that creates an inflection point that causes a massive liquidation event like the one we saw during the past weekend. The trick is differentiating between just another massive liquidation event that gets inevitably bought up, and the final blow-off top that signals the beginning of the end and a shift in trend.
Latest Crypto Developments
In this section, we highlight the latest developments that may be significant in either the price action or the trajectory of the crypto space overall.
Senators Lummis and Gillibrand Introduce Stablecoin Regulation Bill
Senators Kirsten Gillibrand and Cynthia Lummis have introduced the Lummis-Gillibrand Payment Stablecoin Act, requiring stablecoin issuers to maintain one-to-one cash or cash-equivalent reserves and prohibiting unbacked algorithmic stablecoins. This bill aims to foster responsible innovation, ensuring stablecoins cannot be used for illicit activities like money laundering, and proposes a regulatory framework that includes state and federal oversight of stablecoin operations. Additionally, it introduces measures for managing issuer insolvency, including a provision for Federal Deposit Insurance Corporation (FDIC) intervention.
Ethereum Validator Queue Reaches New High
The Ethereum validator queue has reached its highest level since September 2023, driven by the popularity of restaking and the recent launch of EigenLayer on the Ethereum mainnet. This surge in new validators looking to secure the network marks a strong demand amid the protocol's transition to a proof-of-stake system. The validator queue, which is crucial for maintaining network stability, indicates continuing growth and interest in Ethereum's development and security.
Stablecoin Legislation Movement in the US
According to a note from TD Cowen, there has been movement on stablecoin legislation in the US following discussions with Senator Schumer. While specifics are not provided, the implication is forward momentum in the regulatory approach to managing stablecoin operations in the US, focusing on legal clarity and consumer protection.
UK to Implement Crypto Regulatory Framework by July
The UK is set to legislate a comprehensive regulatory framework for crypto assets by the end of July, announced by Member of Parliament, Afolami. The legislation will bring various crypto activities, including exchange operations and custody services, under the regulatory scope of the Financial Conduct Authority (FCA) for the first time, aiming to enhance oversight and security within the crypto sector.
Tether Reorganizes Into Four New Divisions
Tether has announced a significant reorganization into four new divisions, signalling a broadening focus beyond its stablecoin operations. The divisions include Tether Finance, which manages the USDT stablecoin, Tether Power, which invests in bitcoin mining, Tether Data, which invests in technology and AI, and Tether Edu, which offers educational initiatives.
Market Returns
That's Some Good Content!
Recommended articles, podcasts, and other content from this week:
On the Margin podcast - The 2024 Bitcoin Halving | Chris Kuiper
Good Game podcast - Hot Topics: Solana Congestion, Bitcoin Runes, Echo, and Ethena
The Breakdown podcast - The UK Heading Towards Stablecoin Rules
0xResearch podcast - Navigating DeFi's Evolving Yield Landscape with Pendle | TN, Co-founder
Galaxy Brains podcast - Bitcoin Cycles and Halvings w/ Sam Callahan (Swan)
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