July 23 Commentary

News Highlights

1. Ripple XRP Sold to Public Not Securities, Judge Says
2. CBOE refiles 5 Bitcoin ETFs to include Coinbase surveillance agreements
3. Binance lays off employees days after executive exodus
4. Celsius founder Alex Mashinsky arrested and charged with fraud
5. Winklevoss Twins’ Gemini Sues Crypto Conglomerate DCG, Citing Fraud
6. FTX sues founder Sam Bankman-Fried and three others for $1bn
7. Recently Exploited Crypto Bridge Shuts, Says China Detained CEO and His Sister
8. Curve Finance’s $62M exploit exposes larger issues for DeFi ecosystem
9. Curve Finance founder’s $100M debt could trigger a DeFi implosion
10. Sequoia Capital Slashes Crypto Fund as It Downsizes Amid Startup Crunch
11. Nasdaq Halts Plan for Crypto Custody Service Due to U.S. Regulatory Conditions
12. Feds Charge Engineer in First-Ever Decentralized Exchange Hack Case
13. 60k BTC and 60k ETH on Justin Sun’s Tron Seem Unbacked

Chart of the month:

Figure 1: Bitcoin price time series since the beginning of 2019. The chart highlights the current resistance to price action situated around 30k, a mark that separates the exuberance of the bull market, with the accumulation area between 15 and 25k. We currently stand at the crossroad between a renew roaring bull market and a re-test of the post-FTX lows, in case a similarly destructive scenario was to come to play with Binance. source: TradingView

Commentary:

July 2023 has been a month of contrasts with overall quiet price action alongside significant developments in the cryptocurrency markets. While the crypto space was busy with legal disputes and internal conflicts, traditional markets were having a party, with the Nasdaq index soaring 45% in a straight line, year-to-date. Bitcoin, on the other hand, played hard to get, remaining stagnant since March while also showing a lowering correlation with its traditional counterparts, as shown in Figure 2.

Figure 2: Time series of rolling correlation between Bitcoin and traditional instruments (Gold in red, Nasdaq in dark blue, and SP500 in light blue. The chart shows how correlation with equity indices has dropped over July and, overall, is on a downward trend since the beginning of the year. source: The Block

The Bitcoin price has been dancing around a line of resistance at 30k, teasing potential moves towards 40k if the Blackrock ETF gets the green light, or a dramatic drop to 20k, 15k, or even 10k, depending on Binance’s fate with the US Department of Justice. Speaking of legal matters, Ripple XRP got a high-five from a judge, declaring it was sold to the public and not considered securities, boosting investor confidence.

Meanwhile, Binance faced a storm, with layoffs, an executive exodus, and regulatory scrutiny, raising eyebrows about the future of the crypto giant. Exploits in the DeFi space, like Curve Finance’s $62 million exploit, exposed larger issues, triggering concerns about security and risk management. And in the stablecoin world, Tether flexed its muscles, reaching an all-time high in market capitalization, while USDC seemed nostalgic for 2021 levels, as shown in Figure 3.

Figure 3: Stablecoins market capitalization since the beginning of 2021. While all the major stablecoins have experienced growth over 2021, only Tether has maintained its growth trajectory, and as of today, fully recovered its previous all-time high of over 80bn reached in May 2022, just before the Luna collapse. Its competitors, USDC most notably, have lost traction since last Summer and have been dealt the final blow earlier this year, with the regulatory actions against BUSD, and the bank run on USDC resulting from the collapse of SV Bank. source: Glassnode

In the micro-landscape of the cryptocurrency market, July has been characterised by stability albeit underlying tensions are brewing that may signal significant future movements. A closer examination of various market indicators reveals a nuanced picture.

Bitcoin’s open interest, representing the total number of outstanding derivative contracts, after having soared from the depths of the FTX debacle during Q1, has remained mostly stable over the last few months. Interestingly, term Futures have recovered less than perpetual swaps, which have increased their dominance since the beginning of the year.

Figure 4: Time series of global open interest over the last year split by instrument type: perpetual swaps in green, options in blue, and futures in red, It can be noticed that, after having recovered the pre-FTX level, the market has not grown significantly, showing a moderate level of speculation, and somewhat lack of new players joining the market. source: Laevitas

Figure 5: Time series of the 3-month Future basis (green) superimposed to Bitcoin price (yellow). As can be noticed, the annualised yield implied by the premium of Future price on the spot has reached a healthy 6% but has not grown further, in line with the stagnant price action. Source: Laevitas

Figure 6: Time series of funding rates over the last three months. While rates have been predominantly positive, there have been no excesses and only moderate speculation at times of sharper price moves. While the current environment is sustainable and reflects a moderate positive sentiment, it also shows the lack of demand for more meaningful upside exposure.. source: Laevitas

This sense of equilibrium extends to the Bitcoin Future basis, shown in Figure 5, a measure of the difference between the futures price and the spot price. After a decisive increase in June, the basis remained high but stable over July. This stability, while not too low, indicates that the market is not overly leveraged and that there is a healthy interest in derivative contracts. It may also signal that investors are cautiously optimistic, maintaining positions that reflect a belief in potential upward price movement without excessive risk-taking. On the other hand, Futures implied yields are now aligned with Treasuries, and more correctly reflect the cost of capital to hedge such a position (and hence for the market to offer leverage). Funding rates on Bitcoin paint a similar picture, as displayed in Figure 6, with more muted figures in July compared to June, but an overall positive positioning, reflecting the underlying positive sentiment of the market.

Adding to this picture of stability is Bitcoin’s volatility, represented in Figure 7, which has reached a more-than-two-year low. Both realised and implied volatility have dropped since September 2022, contrasting with Bitcoin’s history of substantial price fluctuations. This low volatility may be a harbinger of an impending explosion in either an upward or downward direction, indicating a calm before a potential storm. To match that very low volatility, volumes are down, as to be expected in the middle of Summer, with Coinbase registering its lowest BTC trading volumes in 3 and a half years.

Figure 7: In the upper panel, a comparison between the time series of Implied (green) and Realised (red) volatility over the last 12 months. In the bottom panel (in blue) the spread between the options’ implied volatility and the realised price volatility. A Positive spread is to be expected as a reward for option sellers for providing liquidity to the market. Overall interesting to note the marked downward trend that persisted over the months. source: Laevitas

Looking elsewhere, however, July 2023 has been a month of notable price actions and trends that reflect the evolving landscape of new markets, Web3, and DeFi. The legal ruling on Ripple has had a significant impact on the price action of certain cryptocurrencies. XRP and SOL soared by 50% following the judge’s decision, providing some legal clarity, and boosting investor confidence. On the other hand, CRV, the native token of Curve Finance, dropped by 20%, as the platform was affected by an exploit, and a large USDC loan collateralized by CRV was hunted down towards liquidation, forcing sales of CRV to repay the loan. Exacerbating the significance of these events is the fact that Curve is the reference market for stablecoins in DeFi. Its pools provide the primary mean to swap from one stablecoin to another on-chain, and the balance of these pools often determines the price stability of the stablecoins.

These price movements, shown in Figure 8, highlight the sensitivity of the market to legal rulings, security concerns, and the broader dynamics within the DeFi ecosystem. They underscore the importance of regulatory clarity, robust security measures, and investor confidence in shaping market trends.

Far from the spotlights, meme coins, and NFTs have been suffering in July. The once-vibrant sectors of the crypto market have faced challenges, reflecting a shift in investor interest and a potential cooling of speculative activities. The trends in meme coins and NFTs also have implications for Web3 and DeFi. As the market evolves, the focus is shifting towards building sustainable value, fostering innovation, and creating a decentralized internet (Web3) that empowers users and promotes transparency. The challenges faced by meme coins and NFTs may be indicative of growing pains in the transition toward a more mature and value-driven market.

Figure 8: Monthly mark-to-market price performance for a selection of tokens that have dominated the headlines during the month (Ripple in blue, Solana in purple — Bitcoin in orange — Ripple in blue). source: TradingView

As we wrap up our commentary, the picture for July 2023 is a blend of stability, excitement, legal drama, and innovation. Looking ahead, August seems poised to be a quieter sibling to July.

However, the coming quarters could see the market moving higher, driven by institutional interest in DeFi and potential spot ETF approval. But let’s not get too carried away; traditional finance’s macro situation could still crash the crypto party.

The legal ruling on Ripple, challenges faced by Binance, and exploits in the DeFi space have shaped the broader market dynamics, while traditional markets like the Nasdaq have continued to soar. Simultaneously, Bitcoin has remained relatively stagnant, reflecting a divergence in market behaviour.

On the micro-level, the stability in open interest, basis, and funding rates, coupled with low volatility, has created a scenario of cautious optimism. The price action of XRP, SOL, and CRV, along with the challenges faced by meme coins and NFTs, further reflect the complex interplay within the market.

Looking ahead, the base case expectation for August is that it will mirror July, remaining relatively quiet but overall positive in sentiment and, while we do not expect significant headlines, the Curve saga is expected to come to a resolution, with more or less severe effect on the ecosystem. However, over the coming quarters, the market is poised to move higher. This potential upward movement is driven by increasing interest from institutions to invest in the space and get involved in DeFi via real-world tokenised assets. The potential approval of a spot ETF could also bring substantial spot Bitcoin demand to the market, further boosting investor confidence and interest.

In summary, the cryptocurrency market in July 2023 provides a snapshot of a maturing space, marked by legal clarity, innovation, and underlying tensions. The insights gleaned paint a picture of a market poised for growth but not without challenges. The short-term outlook reflects cautious optimism, while the medium-term points to potential upward movement.