6 December 2021

Market Recap

It was only natural that after bitcoin rejected $69k, $42k was in play. Jokes aside, crypto market saw another round of sell-off, not dissimilar to the 11/16 sell-off on the back of monthly options expiry, TWAP selling, BTC breaking key support level of $56k, and bearish macro sentiments. However, a few things were different this time: 1. BTC (-14%) led the sell-off this time vs. 11/16 when BTC outperformed; ETHBTC rebounded strongly following the sell-off, and currently trades at 0.085; $LUNA recovered to new ATH of $78; $MATIC also held up quite well. 2. Higher level of liquidation. In comparison to ~860mio liquidation on 11/16 (which led us to believe that sell-off was more spot-driven), ~$2.6bn was liquidated this time ($2.1bn long + $0.5bn short liquidation), bringing down total open interest from ~$23bn to ~$16bn (Chart 1). The liquidation cascade was reflected in the futures market, as BTC perpetual funding rates sharply turned negative (Chart 2, 3).

Chart 1: BTC Futures Open Interest
Chart 2: 7dma of BTC, ETH Perpetual Futures Funding Rate
Chart 3: OI Weighted Yield Rate (LHS, Red Line) vs. Price (RHS, Orange Line), from Source: Coinalyze

Aside from the sad price action, security breaches also made headlines in the crypto world, with 2 hacks happening in a span of 3 days. 1.BitMart, a centralized exchange, lost $150mio worth of crypto on Saturday, as ETH and BSC hot wallets were compromised. 2. On the DeFi side, BadgerDAO lost ~$120mio to an exploit — one wallet which lost ~900 bitcoin is believed to belong to Celsius, a crypto lending company. Overall, the week was a good reminder to always be vigilant, and that if things look too good to be true, it’s probably because we are missing something (smart contract risk, counterparty risk, etc.).

On the institutional side, capital gravy train and institutional adoption continue… VCs pumped $4bn of fresh capital into 120 crypto projects in November (DoveMetrics) despite ~10% drawdown in BTC, and VCs around the world announced new funds (Amsterdam-based Maven 11 Capital closed its 2nd VC fund with $120mio raised; Seoul-based Hashed launched a new $200mio fund). On the adoption side, Fidelity Digital announced that it would be partnering with BlockFi to accept bitcoin collateral on cash loans, and banks, such as Goldman Sachs, are also trying to stay relevant by trying to figure out how to offer similar loans.

On the macro side, it was a volatile week of trading as market continued to process the emergence of the Omicron variant + higher probability of accelerated asset purchase tapering + mediocre jobs data (NFP +210k, vs. Est. 550k, although rest of the data, including unemployment rate and labour participation rate, was decent). Powell acknowledged in Congressional testimony that inflation pressures had become broad enough and remained elevated for long enough for the Fed to consider accelerating the pace of monthly bond purchase tapering. Market also interpreted this as potentially moving forward the timeline for the Fed to begin increasing short-term interest rates, leading to flattening yield curve (2s10s –26bp). The tightening of monetary policy, together with supply chain disruptions, spooked the markets and led major equity indices to pull back (ES -1.2%, NQ -2.6%). Going into the week, we expect more volatility with the CPI report arriving on Friday, just 5 days before the crucial December Fed meeting.

(Dec 06, 2021, Top 5 Crypto KPI)

What is Happening?

FTX to seek $1.5bn in new funding round at $32bn valuation. The new funding round would potentially value FTX at $32bn and FTX.US at $8bn. Most recently, FTX raised Series B-1 funding round in October ($420mio @ $25bn valuation), and Series B funding round in July ($900mio @ $18bn valuation).

Square changes its name to ‘Block’ as part of broader push into crypto. The announcement came 2 days after Jack Dorsey stepped down as the CEO of Twitter; the company stated that the name change stems from firm’s desire to embrace blockchain technology,

Conclusion

We continue to view digital assets (bitcoin or not) as risk assets, and given the continued macroeconomic concerns, especially on Fed tapering, we are wary of further downside in the market. Having said that, the reset in open interest is healthy and we are inclined to think that it is medium-term constructive for the market. As such, we are adding to our books at this juncture.

Good Luck!