Insto Weekly

David Duong, CFA, Director of Research

This week, BTC saw a large 2.3 standard deviation move lower (relative to the two-week average) which hasn’t been seen since China’s crypto crackdown in late September. In spot terms, BTC breached the $60,000 psychological level, and we’re now watching how resilient the $57,000 key technical support level will be. Let’s look at some potential factors driving this move.

Levered longs

One story behind the sell-off argued that higher funding rates on perpetual contracts may have been to blame for the weakness, as BTC longs were overleveraged. Indeed, funding rates did a round trip from an average 0.0589% in early November (penalizing longs / encouraging shorts) to 0.01% two weeks later. But we think this doesn’t necessarily explain the massive sell-off in the last few days as by Monday (15 November), funding rates were already down to 0.007% (according to Skew). That said, we cannot measure the cascading effect of paper hands. The run-up in prices already outpaced the move in other asset classes (a 3-standard deviation up move a week ago vs only a 1.5-standard deviation increase in the S&P 500 -- see chart below) and probably needed correction.

Mt. Gox settlement

Another theory is that the Mt. Gox settlement may have been behind the move, as the Rehabilitation Trustee published its confirmation order on 16 November, coinciding with the market sell off. Supposedly, creditors will be reimbursed for 141,686 worth of BTC (c. USD8-9bn) according to Bloomberg, creating fears among investors that the market could be flooded with BTC. However, we think there are two mitigating factors to these concerns. First, we think payments won’t be made until mid-2022 at the earliest or even possibly 2023. Second, some hedge funds have been offering claimants early payouts in exchange for their settlements, meaning this will fall into institutional rather than retail hands. That said, we cannot speculate on whether these institutionals intend to “hodl” these assets. Nevertheless, these factors should limit the bitcoin weakness surrounding these developments.

Taxes

Some claim the volatility is associated with the recently signed US infrastructure bill, which requires cryptocurrency exchanges to file 1099-Bs with the IRS. But we think this could be a “post hoc ergo propter hoc” fallacy — that is, just because the sell off happened after this event doesn’t mean it was the cause. Indeed, these changes don’t officially take place until 2024, so we don’t think it necessarily makes sense to cash out now and generate a taxable event. Moreover, it doesn’t seem like the regulation would apply to decentralized exchanges.

Spot ETF rejected

Finally, there’s the SEC rejection of VanEck’s bitcoin spot ETF, which happened on 12 November -- only a few days before the market move. Despite happening days before the deepest part of the sell off, this event was rather meaningful insofar as the SEC wrote a whopping 51 pages on why the ETF proposal was inconsistent with the requirements to “prevent fraudulent and manipulative acts and practices” and “protect investors and the public interest.” The timing of this letter came much sooner than we were expecting and may have been a signal that a spot ETF remains far from approval despite SEC Chairman Gary Gensler’s consent to futures ETFs. In our view, this could have been enough for some institutional investors to adjust their bitcoin targets.

Macro environment

Plausibly, any combination of the factors above could be contributing to this move, particularly when the macro environment itself is so uncertain. The broad USD index (DXY) strengthened significantly on the back of front end rates over the last week for example. Inflation is now a mainstream concern, which we think puts more onus on combating inflation for the US Federal Reserve affecting its policy priorities, possibly displacing maximum employment. All of this is relevant for cryptocurrencies for two reasons.

First, it displaces the role of the “Fed put” as a driver for monetary policy, and second, it means the central bank may quicken the pace of its “gradual” tapering stance. While BTC could probably survive an economic slowdown, faster liquidity withdrawal could be painful for cryptocurrencies as an asset class, especially after months where the Fed has given us the impression that they’re on autopilot.

That’s exacerbated by headlines that a decision on Jerome Powell’s renomination as Fed chair is “imminent.” Even now, it’s still unclear whether we are entering a new market regime as we await further news on tapering. That is, while the moves this week appear to be exaggerated, it’s hard to make an accurate assessment of that without more color on whether the Fed might be behind the curve.

Crypto & Traditional Overview

Coinbase Exchange and CES Insights

Exchange 

Trading activity on the exchange has been solid over the last week. We have seen a drawdown in valuations across the board, with the total crypto market capitalization receding to $2.6tn. The main narratives driving the flows were the L1s as well as the Metaverse; during and after the sell-off, there was some flight to the perceived safe haven of BTC.

In terms of the volume breakdown, BTC and ETC have reclaimed the top spots while SHIB is still in the third place for now as the retail meme coin mania cools off. Other noteworthy contenders are the Metaverse-play MANA as well as the usual suspects among the L1 chains such as SOL or ADA for example.

Coinbase Execution Services

Over the last week we have continued to see inflows into BTC and ETH from institutions while we were consolidating just below the all-time highs. In addition, we saw interest in major L1 protocols such as SOL as one of the main competitors to ETH.

At the same time, we have continued to see some profit taking in other altcoins similar to the previous week as well as dip-buying activity after the correction early this week in BTC as well as ETH and other blue chip projects such as SOL.

Derivatives

We are seeing CME futures basis stabilizing at 8% annualized post ETF launch at the end of October. According to the CFTC Commitment of Traders report, the short side of the CME Bitcoin futures open interest is primarily coming from leveraged funds that are looking to monetise the basis. Net leveraged funds shorts are near an all-time-high in bitcoin terms. 

On the options side, we are seeing ETH skew rallying strongly this month as the market reprices downside risk and spot comes off in the last ten days.

Bitcoin Technicals

With a sharp selloff and continued weakness in crypto markets, BTC sold off sharply to a low of around $56,621 -- and below the lower Bollinger band, an oversold indicator. We’ve since bounced off the lower band but BTC continues to trade with weakness. The last three times BTC traded firmly below the lower band, it was due for a healthy bounce. 

Notable Crypto News

Institutional

• Crypto Venture Firm Paradigm Announces $2.5B Fund, Industry’s Largest (CoinDesk)
• VanEck futures ETF Launches After Weeks-Long Delay, Third in the U.S. (Bloomberg)
• ConsenSys closes $200M raise at $3.2B Valuation (The Block)

Regulation

• President Biden Signs Infrastructure Bill Containing Crypto Broker Reporting Requirement Into Law (CoinDesk)
• Senators Seek to Amend Bitcoin Reporting Changes In Infrastructure Bill (CoinDesk)

General

• Crypto.com is spending $700M in cash to rename Staples Center in Los Angeles (The Block)
• Rehabilitation Plan for Mt. Gox is Now Finalized (The Block)

Coinbase

• How Coinbase is Building our Global Engineer Team (Coinbase Blog)
• Coinbase is looking at support for third-party DeFi apps on its platform (The Block)
• Alchemix (ALCX), Ethereum Name Service (ENS), Gala (GALA), mStable USD (MUSD) and Power Ledger (POWR) are launching on Coinbase Pro (The Block)
• Voyager Token (VGX) is launching on Coinbase Pro (The Block)

View From Around the World

Asia

India will ban the use of cryptocurrencies for payments, but will allow and regulate trading of crypto as assets according to government sources. The government plans to present a crypto regulation bill at the end of this year, which appears to have changed course from the earlier plans to ban cryptocurrencies in the country and are focused more on regulating crypto as an asset. (CoinDesk)

Europe

Several Nordic countries such as Sweden and Norway have raised the topic of a Bitcoin mining ban due to its energy use in the wake of COP26. A Norwegian minister has called the energy use 'difficult to justify'. The argument that Bitcoin is supposedly bad for the environment has been shown to have no substance by the crypto industry many times. (Euronews)

Increased “exuberance” in housing markets, junk bonds and crypto assets have created vulnerabilities that will be exposed if higher than expected inflation leads to a sharp rise in interest rates, the European Central Bank has warned. (Financial Times)

The Week Ahead

Upcoming significant crypto events to note

• November 2021

• 11/26/21 - Crypto derivatives NOV-21 expiry

On-Chain Indicators

All on-chain data and metrics are powered by Coinbase Analytics. Email dave.bean@coinbase.com for more details.

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