Figure 1: Short squeeze in pure GME style on small-cap MobileCoin, briefly advertised in the past by Signal founder Marlinspike. Unknown trader built up a short position estimated to be 25% of the token circulating supply ($100-$150m) by borrowing the token on FTX exchange. As other traders took notice and lending rates for MOB skyrocketed, the squeeze began, with considerable buying pressure and increasing funding costs for the short seller (rates peaked at 3000% APR while the price increased 4x in two days. Currently, it is voiced that $200m short is still in place, although it represents a much smaller share of the market cap, as demonstrated by the prevailing borrowing rate. Source: Tradingview


With March having started in the depths of one of the most severe drawdowns of this bull run, the +30% performance for Bitcoin, and lower for most other assets, is clearly unimpressive. Looking closely at the macro-trend so far this year, we can notice one of the most violent rotations from pure DeFi names into microcap projects, that have recently undergone a strong growth (more than 130% in March in aggregate β€” see Figure 2) and avoided the doldrums the rest of the market has fallen into.

Growth in microcaps has been reasonably differentiated, with leading themes ranging from NFT art, collectables and in-game items, IoT networks, social media, decentralised cloud storage, distributed computing, streaming of videos and music, and decentralised marketplaces. Everything that did not have anything to do with Finance and Payments has boomed this month. We do not expect this trend to persist, and the relative slow-down of the DeFi sector has more to do with the impressive growth during the first half of the quarter, rather than a weakening of the sector. In fact, Uniswap v3 has recently been announced to go live in the coming weeks, bringing new dynamics to the liquidity provision game with more customisability in the strategies that can be implemented by the LPs, potentially tilting the balance towards professional players at the expenses of retail users, who in turn, might then be attracted by on-chain asset management projects, of the likes of Yearn finance, that might be able to compete in sophistication, reach and balance sheet, with traditional businesses. Growth for Web3 and non-financial project also seems in a very early phase, with Virtual Universes having just started to heat up and having their full potential tied with the adoption of virtual reality tech, and new concepts like the DAOs (decentralised autonomous organisations) having yet to hit mainstream awareness.

Figure 2: MTD price chart for the index products offered by FTX. In particular, it can be noticed that the SHITPERP contract, a future on 50 small-cap coins, has considerably outperformed the rest of the market. Source: Tradingview

Derivative markets on large-cap coins have behaved as expected in a relatively slow market, with synthetic variable rates having, on average, dropped by half compared with the levels maintained over the first three weeks of February (see Figure 3). During the last week, on the other hand, since the expiring of quarterly Futures and Options, rates have picked up again, with overall demand for USD lifting over-collateralised lending rates (almost a risk-free rate in the space) in the high teens, while lifting the synthetic three months fix, implied by the Futures, at approximately 40% APR (which however includes a counterparty risk premium). The steepness of raw price premia has increased during the last week of March, signalling a long-term demand for leverage exposure. The main reason for dampened volatility in the previous weeks seems to have been the approaching option expiry, which accumulated a $6bn open interest having been the main reference quarterly maturity throughout the most heated moments of the bull run. Approaching the expiry, however, the market remained unperturbed, probably due to the fact that the vast majority of open interest was either deep in or out of the money and, therefore, near-zero gamma.

Figure 3: 12h rolling average of hourly premium of perpetuals on spot. It can be noticed how March has been characterised by an environment of low demand for leveraged products, as opposed to February. The trend seems to be reverting with a pickup in premiums as we enter the new quarter. Source: Tradingview

A different metric that can be used to gauge the frothiness of markets might be the ratio between derivative and spot on-exchange volume, shown in Figure 4. Looking at the historical evidence, one might find that peaks in such metric have often coincided with local tops in price. The recent increase in Derivative volumes could therefore be interpreted as an early warning signal, albeit this time around, the sudden increase in institutional participation in the market might have permanently changed the market structure that has prevailed so far. On the other hand, Binance recently disclosed that 60% of traders use leverage 20x or higher, and 21% uses 125x. A questionable risk management approach, to say the least.

Understanding the nature of the crypto market is of paramount importance to assess both endogenous and exogenous risk factors affecting a portfolio. One of the leading narratives and catalysts of this cycle has been the inflation-hedge / store of value / digital gold identity of Bitcoin, which went mainstream last Summer, in response to steep increases in money supply and fiscal stimulus. Surprisingly enough, however, since then the historical correlation of Bitcoin with gold, as shown in Figure 5, has weakened dramatically having been in negative territory for months now. At the same time, the correlation with S&P500 and technology stocks has remained strong throughout 2020 and the first quarter of 2021, forcing us to reassess the real drivers behind the incredible growth over the last few months. During the last couple of years, the market capitalization of the entire crypto ecosystem has been, on average, growing faster than Bitcoin itself, with little pretence to take away the store of value narrative from it, but rather focusing on a number of different applications among which DeFi is the poster child. Difficult to argue many of these projects are or should be seen as, anything but a tech play.

Figure 4: Future to Spot volume has been trending up during this bull run, suggesting higher institutional participation as well as an increasing level of leverage in the system. Source: Glassnode Uncharted
Figure 5: Rolling weekly historical correlation between Bitcoin and Gold (left panel) and between Bitcoin and S&P500 (right panel). The two correlation time series have followed opposite paths since 2020, with Bitcoin behaving more closely to a growth stock than (digital) gold. Source: Enigma Securities

The next question is therefore whether the appetite of investors has been satisfied, and what the demand is going to look like, as well as the supply. The chart from Glassnode in Figure 6 shows two proxies from supply and demand: the balance on exchanges, and the ratio of logins to signups. The first metric, having been in a steady decline since March 2020, signals a decreasing supply of Bitcoin available for sale, and a longer-term horizon for the investors that acquired Bitcoin during this period. The second metric, the ratio of logins to signups estimates the pace of new entrants in the market, and it has recently spiked back to early 2019 levels showing a considerable slow down in new entrants and a shift of activity towards larger, more active accounts.

Figure 6: Ratio of Logins to Signups on major exchanges and FIAT gateways (blue) superimposed to Bitcoin price (grey) and BTC exchange balances (orange). Despite the continuate drop in exchange balances, the logins to signups ratio has drastically shifted to 2019 bull run levels in the last few weeks. Source: Glassnode Uncharted

The following picture, in Figure 7, courtesy of Chainalysis, is a wonderful tool to assess the cost base of every Bitcoin ever mined, and therefore to gauge the economic interests at different price levels. The caveat of this indicator is that it relies uniquely on on-chain transfers and it has limited ability to distinguish the real intent behind any given transaction. The charts show the cumulative distribution of prices at which a given number of coins has been purchased, hence indicating how much value has been transferred to the Bitcoin ecosystem at a given price level. Among the information that can be read on these charts, we find that $88bn have been transacted above the $50,000 price level, indicating a very strong demand for Bitcoin at current prices. Further to that, 5.6m BTC have been acquired at more than $30k, almost half of the liquid Bitcoin supply, as inferred by the clear split between those that accumulated below $10k (approximately 10m coins, half of which may be lost), and the remaining, that has constantly moved during the last few months.

The macro picture for the industry appears as rosy as ever, despite a number of early warning signals that have caught our attention. These structural changes could also be the result of the profound shift in the investor base, something we never witnessed before in crypto, and not necessarily cause alarmism.

Figure 7: Price Cumulative Distribution of all circulating Bitcoin supply. The curve is built by computing the price at which every Bitcoin has been last moved. Despite the inaccuracies due to simple transfers between wallets belonging to the same owner (and not payments), the picture pained by these curves is of an increasing cost base and a considerable deployment of capital at current prices. More than $88bn of value has been transacted above $50,000, a figure that climbs to more than $250bn counting all coins transferred at prices above $30,000. $250bn was Bitcoin market cap when it traded at $14,000 last, end of October 2020. Source: Chainalysis




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Fasanara Digital

Fasanara Digital

Market neutral quantitative approach to investing in cryptoassets.

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