Original Title: Weekly: Chaotic CrossroadsAuthor: David Han (Institutional Research Analyst)
Published date: April 19, 2024
Key takeaways:
After the intensification of the conflict in the Middle East and its continued decline at the end of last week, the sharp decline has washed away a lot of leverage in the space, even as the Bitcoin halving is near.
The BTC perpetual contract funding rate briefly turned negative for the first time since October 2023 and has since remained near zero.
So far, 2024 BTC has seen the smallest decline so far, at 16% and 27%, respectively, even below the record levels of 2023. As a result, there may be more room for downside, and traders have been configuring accordingly based on options and on-chain data.
market
With the halving approaching, leverage has been largely cleared out of the market. Bitcoin's sharp decline following the intensification of conflict in the Middle East over the weekend, combined with its continued decline 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 near zero and has crossed the zero mark several times in recent days. In our view, this may indicate some temporary bearish bias, but there is no large-scale panic effect. In our view, this directional uncertainty illustrates our view of Bitcoin's dual role as a risky asset and a safe-haven asset. While marginal sellers appear to be mostly de-risking, there has also been strong buying between $60,000 and $62,000.
However, this is not to say that the market is not likely to move further lower. From the perspective of maximum drawdown, 2023 was the best year for cryptocurrency, with peak drawdowns of 20% and 27.4% for BTC and ETH, respectively. Prior to this, the year with the smallest maximum drawdown for BTC was 2016 at 31.3%, and the year with the smallest maximum drawdown for ETH was 2021 at 57% (see Table 1). The retracement so far in 2024 is even smaller than in 2023, and given the elevated year-to-date real volatility levels, the potential for further downside is entirely present.
Since its launch 15 years ago, volatility in the asset class has been declining overall, although it reached a local bottom of 3-month real volatility in October 2023 (see Figure 1). Since then, the price has steadily reversed upwards as volatility increases. We believe that if we continue to adopt a hawkish risk-off environment, those who see Bitcoin as a risky asset are likely to continue selling until they reach a balance with those who see Bitcoin as a safe-haven asset.
In fact, short-term traders on Deribit seem to be anticipating further downside dynamics in the near term, so they hedge their implied volatility premiums on options below the strike price. Interestingly, however, these premiums are skewed to the upside for longer-term options expiring in June 2024 and later. We think this reflects a broader cyclical sentiment that we appear to be far from reaching a cyclical peak, but there is a risk of further declines in the near term.
Lever measurements on the chain 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 of late January 2024. In our view, this suggests that traders still retain some leverage (and therefore constructive in the long run) but have already derisked their positions to some extent in order to cope with short-term downturns.
Crypto and traditional financial data
(As of 4 p.m. ET on April 18)
Source: Bloomberg
Coinbase Exchange and CES Insights
Volume recovered somewhat over the weekend and remained high for the week. On Saturday and Sunday, traders focused on geopolitical uncertainty. This focus shifted quickly in the middle of the week after Jerome Powell hinted that interest rates could remain higher for longer, giving the market another reason to sell. Taken together, these events were enough to clear most of the leverage in the market and bring the funding rates for BTC and ETH close to zero. While lower leverage is constructive for the market, we are entering a seasonally tough period and it remains to be seen if prices can hold their ground here. We see from the trading desk that the liquidity of mainstream coins and altcoins is almost equal.
Coinbase Platform Trading Volume (USD)
Coinbase Platform Trading Volume (Asset Ratio)
Funding rate
Notable Crypto news
institution
Web3 investment grew 55% in Q1 as Crypto venture capital interest rebounded (CoinTelegraph)
Hong Kong spot bitcoin ETF could go live as early as this month (The Block)
Supervision
Tether and Circle disagree on how to address global jurisdiction over stablecoin rules (Coindesk)
routine
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 gearing up to launch Dogecoin futures later this month (Coinbase Blog)
Global perspective
Europe
EU's MiCA rules have little impact on European Crypto market, regulator says (Coindesk)
The UK will enact new legislation on stablecoin and cryptocurrency staking, trading, and custody by June or July this year (Coindesk)
Baden-Württemberg Bank, Germany's Largest Federal Bank, Plans to Start Offering Crypto Custody Services in Partnership with Bitpanda Exchange (Bloomberg)
Barclays, Citibank, and others are testing tokenized deposits in the UK (Bloomberg)
Asia
Hong Kong approves first batch of spot Bitcoin and Ethereum ETFs to drive it to become a crypto hub (The Block)
Hong Kong-based First Digital's $3 billion stablecoin moved to the Sui network to power its DeFi (Coindesk)
RBA shows Australians won't value privacy or security in retail CBDCs (Cointelegraph)
Vietnam's Ministry of Justice Officials Say: Vietnam Has Not Banned Cryptocurrencies, Calls for a Legal Framework (VNExpress)
Big events of the week ahead