April 23 Commentary

News Highlights

1. First EU-Wide Crypto Regulations Clear Final Parliament Vote
2. Bankrupt crypto exchange FTX has recovered $7.3 billion in assets
3. London Stock Exchange to offer Bitcoin futures and options
4. SEC Charges Crypto Asset Trading Platform Bittrex and its Former CEO
5. Coinbase gets Bermuda license, plans to launch offshore exchange
6. Terra co-founder Daniel Shin and nine others formally charged by South Korea
7. Coinbase sues the SEC for answer on rule specific to digital assets
8. Binance.US calls off $1.3 billion deal for Voyager’s assets
9. LayerZero reaches $3 billion valuation in Series B funding round
10. Sotheby’s to auction NFTs from failed hedge fund 3AC’s collection
11. Berachain raises $42 million to launch a Layer 1 blockchain

Chart of the month:

Figure 1: Stock to Flow model for Bitcoin price since late 2016. The chart indicates the times when Bitcoin issuance is reduced (“halvening” events) and the expected price action in response to these changes in the inflation rate. Historically, as Bitcoin becomes more scarce, its price has increased in lockstep, suggesting that if such behaviour repeats, we could observe positive price action before the end of the year. Source: LookintoBitcoin

Commentary:

In April, the crypto market experienced a relatively quiet period, as the prices of major digital assets remained stable and generally experienced low volatility. Both spot and derivative markets displayed muted activity, though Ethereum saw moderate price fluctuations mid-month during the Shanghai (Shapella) upgrade. Ethereum stakers were finally allowed to withdraw locked coins from the Beacon chain, and contrary to some expectations, the network did not face an overwhelming number of withdrawals, as shown in Figure 2. In fact, the chain witnessed also considerable inflows, and unstaked ETH did not result in significant underperformance of the asset.

Despite the lack of clear catalysts for short-term growth in major coins, some speculative activity surrounded meme-coins and over-hyped launches of new layer-1 coins. While the overall market has been relatively stable, the month saw several notable events, including regulatory battles between the SEC and the crypto industry, a Bermuda license for Coinbase, and the continued growth of the DeFi sector. On the macroeconomic front, the environment has seen little change, with inflation remaining high, albeit on a downward trend, and the Federal Reserve set to raise rates by 25 basis points during the next meeting.

The Federal Reserve’s ongoing rate hikes are putting pressure on banks, with recent troubles extending to yet another financial institution, as First Republic Bank was acquired by JP Morgan. This trend suggests that continued rate hikes could lead to further instability in the banking system. The impact on traditional financial markets cannot be ignored, as it may have ripple effects on the broader economy. Adding to these concerns, central banks have shown strong demand for gold, moving away from the dollar to the continuous devaluation and the printing of new currency. In the event of a recession and increased financial instability, the government would likely print even more dollars to stimulate the economy, further amplifying the demand for store-of-value assets like gold and Bitcoin. As the macroeconomic landscape evolves, the crypto market’s response to these developments will be crucial to watch in the coming months.

Figure 2: YTD time series of daily deposits and withdrawals from the Ethereum staking pool. It can be observed that since withdrawals have been enabled, inflows have also increased suggesting that investors feel safer staking their coins now that they are certain of being able to recover them when needed. Contrary to some expectations, the sustained outflows have not caused any significant sell-off, partially due to the popularity of liquid staking protocols, which allowed to trade staked ETH even before Shapella. Source: The Block

The evolving macroeconomic landscape has had a notable impact on the price action of major cryptocurrencies, such as Bitcoin and Ethereum. Throughout the month, both assets experienced limited appreciation, with Ethereum exhibiting slightly more volatility than Bitcoin due to the Shapella upgrade, which caused a run-up in price before the event, followed by a subsequent correction. While there were few strong performers during the month, most gains were concentrated among small-cap coins in the web3 sector. On the other hand, DeFi tokens like Serum, Trader Joe, and Pancake Swap witnessed considerable losses. Interestingly, Tether, a popular stablecoin, saw strong demand during the first half of the month, trading at a significant premium. However, this premium decreased considerably over the second week, reflecting shifts in market sentiment.

Figure 3: Monthly exchange trading volume over the last 12 months. It can be observed that April represented a correction from the positive trend established since the FTX collapse, with volumes dropping to their lowest point over the period, excluding December 2022. Source: The Block

Trading volumes in the crypto market have shown a decreasing trend month-on-month, with spot volumes experiencing a more significant decline compared to derivatives, as shown in Figure 3 and 4. This suggests that there may be some degree of speculative activity occurring within the derivatives market. However, the year-to-date trend remains positive, with both spot and derivatives volumes slowly increasing over time. Open interest, a measure of the size of the derivatives market, has remained relatively stable throughout the month as shown in Figure 5, indicating that derivatives markets have managed to maintain investor interest despite a general drop in activity. Premiums on derivatives have overall decreased from the previous month, signalling a cool-down in the demand for leverage. This trend can be observed in the funding rates, which have turned negative on numerous markets, and the compression of future basis over the month. In Figure 6 we display the average premia on Bitcoin perpetual swap to illustrate the reduced demand for upside leverage.

Figure 4: YTD timeseries of the ratio of the spot to derivative trading volume for Bitcoin. Increasing participation in derivative markets has caused the ratio to move lower over the period in a consistent trend from the high 60% spot activity (less than 40% of total trading activity) to the low 20% (around 15% of total trading activity). Source: The Block

Figure 5: Open Interest time series for Bitcoin perpetual swaps since the FTX collapse. Inverse and Linear contracts are represented with the orange and green lines respectively. It can be noticed that, while linear markets have recovered the pre-FTX size (also due to the appreciation of the underlying), inverse contracts remain on a downward trend and keep seeing their popularity decrease. Source: coinalyze

Figure 6: Monthly time series of the average premia on perpetual swaps compared to a reference spot index. Funding rates implied by such premia can vary depending on the specifics of each Exchange. Premia time series are shown for BTC (orange) and ETH (blue) and separately for linear (line) and inverse contracts (dotted — bold). It can be noticed how the volatility of premia has been relatively low during the month, displaying a consistent but mild discount to spot, indicating a lack of demand for upside exposure. Source: Trading View

Figure 7: Time series of the ratio of DeFi vs CeFi trading volumes. Despite April has seen a contraction in DeFi volumes compared to centralised counterparties, the overall trend since the Summer of 2022 remains positive and potentially on track to recover the ATH of over 15% recorded in December 2021. Source: The Block

While trading volumes in both DeFi and centralized exchanges (CeFi) have experienced declines, DeFi volumes have dropped further, resulting in a lower level than the previous two months. Consequently, the ratio between DeFi and CeFi volumes has decreased during the month, despite being on a positive trend since the collapse of FTX, as shown in Figure 7. This contrasting behavior may offer insights into the evolving dynamics between decentralized and centralized platforms in the crypto ecosystem.

Despite the overall drop in trading volumes, the total value locked (TVL) in DeFi has increased over the first two weeks of the month, returning to levels seen before the FTX collapse, only to drop together with ETH price over the last two weeks, as shown in Figure 8. Furthermore, activity in DeFi has risen in specific sectors, indicating that the decentralized finance space continues to develop and mature. This growth in TVL and activity suggests that the DeFi market remains resilient and adaptive, even in the face of broader industry challenges.

Figure 8: Time series of total DeFi value locked (TVL) since the Summer of 2022. After a promising increase in assets deployed in DeFi until mid-April, the last two weeks of the month have seen a correction partially due to the ETH price action over the period. Source: DeFiLlama

The increasing prominence of decentralized platforms is further evidenced by the growth in online traffic for web3 applications like Metamask and Uniswap over the last nine months, as shown in Figure 9. In contrast, centralized exchanges have seen a significant decrease in traffic, along with the NFT platform OpenSea and platforms like CoinMarketCap and CoinGecko. These trends highlight that decentralized activity continues to grow despite the overall cooldown in the crypto industry, reinforcing the importance of monitoring developments in the DeFi space as they unfold.

Figure 9: Change in web traffic since the Summer of 2022. The chart shows how, despite the severe and homogenous drop in activity on all major websites linked to the Crypto industry, decentralised tools like MetaMask (self-custody wallet) and Uniswap (Decentralised Exchange) have seen increased traffic over the period. Source: K33 Research

Over the last month, stablecoin markets have shown signs of stabilization following the volatility observed in the previous month. All major stablecoin currencies, such as Tether, USD Coin, and Binance USD, have remained close to their pegs, ensuring that their value remains stable against the US dollar.

However, despite the stable prices, the overall stablecoin market size decreased during the month, as shown in Figure 10. Tether has managed to increase its market share at the expense of Binance USD (BUSD), which has recently faced regulatory scrutiny, resulting in its issuer, Paxos, halting the creation of new coins. Additionally, stablecoins have been steadily leaving exchanges since the collapse of FTX. Although there was a slight slowdown, outflows have continued during the month, potentially signalling that traders are reducing their exposure to centralized venues in favour of decentralized alternatives. This trend further highlights the ongoing shift towards decentralized platforms in the crypto industry.

Figure 10: 12-month time series of major stablecoins market cap. It can be noticed how overall supply has shrunk over the period. More recently, due to regulatory actions on BUSD, its issuer Paxos has halted the creation of new coins, allowing Tether’s USDT to gain market share. Source: The Block

In conclusion, the crypto market has faced a myriad of challenges over the past month, with regulatory risks looming over the industry. The United States has maintained its adverse stance on crypto and provided limited clarity, while Europe has recently approved Mica, the first EU legislation for tracing transfers of crypto-assets like Bitcoin. Despite these regulatory developments, the market has demonstrated resilience, with DeFi and decentralized platforms continuing to grow.

As we look ahead, it is unlikely that there will be a sudden increase in activity before the summer, and one of the few catalysts on the horizon is the Bitcoin halving, set to occur in approximately one year. However, should the Federal Reserve ease economic conditions, we could potentially see an uptick in activity and positive price action towards Q3, following the summer months. In this complex environment, it remains essential for investors to closely monitor the evolving dynamics between the macroeconomic landscape, regulatory developments, and the crypto market, as they navigate the challenges and opportunities ahead.