25 October 2021

Market Recap

ProShares Bitcoin Strategy ETF ($BITO) listing was a historical moment, with $BITO becoming the fastest ETF to reach $1bn in AUM. However, just like how Coinbase’s historical IPO on 4/14 set the local top for bitcoin, trading of $BITO saw bitcoin hit new ATH of $67k on Wednesday, followed by profit-taking and flash-crash on BInance.US (wick down to $8,200). Funding rates (Chart 1) and open interest (Chart 2) spiked higher with higher prices, and still remain at elevated levels. However, market structure might be changing with futures-based ETFs — CME (Chart 3) is now the single largest venue for bitcoin futures, and we expect its market share to grow until spot-ETFs are approved.

Chart 1: YTD 7-Days Moving Average of Hourly Funding Rate for BTC and ETH on FTX
Chart 2: Bitcoin Price (Upper Panel) vs. Open Interest (Lower Panel), from Source: Coinalyze
Chart 3: Exchange Bitcoin Futures Open Interest ($US bn), from Source: Skew.com

The bid for futures could fundamentally change the lens we view open interest and funding rate. The profit-taking also coincided with alts rallying, and we prefer alts to bitcoin now as the next potential leg in the bull cycle. ETHBTC sharply bounced off from 0.06 support, and it’s interesting to see the divergent funding rates for BTC and ETH (Chart 1) despite bitcoin and ether trading close to ATHs, further corroborating our thesis on how bitcoin futures ETF is fundamentally changing the market structure. Smart contract platforms ($SOL +26%, $LUNA +18%, $AVAX +17%, $MATIC +11%, $FTM +20%, $RUNE +68%, $ONE +31%) and meme-coins ($DOGE +15%, $SHIB +43%; not the best sign for the market…) outperformed, and Kimchi premium continues to be at ~4%.

On the institutional side, capital flow into both equities and asset class continued. FTX raised $420.69mio from 69 investors, including Blackrock, Temasek, and Tiger Global, at $25bn valuation; the valuation is ~39% higher from $18bn valuation just 3 months ago. PIMCO’s CIO stated that the company plans to gradually invest more in digital assets, especially as part of their trend-following or quant-oriented strategies, and that some of its funds are already trading crypto-linked securities (in terms of the basis, not market exposure). Facebook also announced partnership with Coinbase as custodian for its Novi wallet, and will be launching pilot tests in US and Guatamela with Pax Dollar, albeit in midst of political pushback.

On the macro side, US equities moved to record highs with series of positive earnings surprises. S&P 500 specifically notched 7-day winning streak, the longest since July, and its Q3’s net income is expected to rise ~33% compared to Q3’21. However, inflation may be dampening investor sentiment, with fund managers turning bearish on growth prospects for the first time since the depths of the pandemic according to BofA Securities Survey. Oil prices are highest they have been in ~7 years, and with expectations of more active central bank policies and rise in inflation expectations, front-ends (2s @ 0.456, highest since Mar’20) have been selling off although Powell’s statement that it is not yet time to raise rates due to low employment levels helped yields ease off their highs. Going into the week, US 3Q GDP growth number is due on Thursday.

(Oct 25, 2021, Top 5 Crypto KPI)

What is Happening?

Binance Smart Chain developers proposed new burning update called BEP-95, which will burn a portion of the transaction fees paid in BNB for all transactions on the blockchain, not unlike that of EIP-1559. The team has suggested that 10% of the fees should be burned, although the burn ratio would be adjustable via governance. Binance currently conducts quarterly burn of the $BNB (17th quarterly burn was just completed last week, with token burn of 1,335,888 BNB, ~$640mio equivalent), mostly from its CEX revenues. $1bn BSC growth fund and deflationary tokenomics proposal are complementary with the former helping the demand side for $BNB (grow activities and TVL on BSC), and latter helping the supply side of $BNB (reduce supply by burning ). Other tokens, such as $LUNA, $ETH, $AVAX have implemented/proposed similar burn mechanisms.

Conclusion

Bull market still seems intact, but with BTC and ETH having rejected ATHs, near-term volatility seems likely. Unlike in the last few months where we saw clear themes (“jpeg szn”, “layer 1 szn”, “orange october”) driving price action, we currently don’t see single, coherent theme underpinning market narrative and price actions. Until then, we prefer being overweight on tokens with good technicals, and farming yields.

Good Luck!