Volatility came back with a vengeance last week. The crypto market capitalization was down 10.7% (or 11.8% excluding stablecoins) over the past seven days, and it currently sits at $1.03 trillion (or $903 billion excluding stablecoins).
The week's positive highlight was OP, the only asset with a market capitalization above $1 billion that delivered a positive performance. That was because of its recent underperformance and because it continues gaining traction among Ethereum L2 solutions fueled by crypto social-fi app friend.tech (more on that below). On the other hand, CRV, SHIB, and UNI were among the larger assets that dived more than 20% during the turbulent week.
The highlight of the week was, of course, the sharp market drawdown on Thursday. Shortly before the event, a news report about SpaceX writing down its BTC position got somewhat overblown on Twitter. Evergrande, once China’s top-selling real estate company and the world’s most indebted property developer, filed for Chapter 15 protection in New York at about that time.
But more important than the initial spark, the market was primed for a pronounced correction. As we highlighted just last week, the build-up in open interest almost to pre-FTX levels amid multi-year lows in liquidity and trade hinted that a sharp reversal was on the horizon. Since last Thursday, open interest in BTC and ETH has reduced from $18 billion to $14 billion, which is in line with the levels before June but still slightly higher than the $12 billion lows for the year.
The combination of relatively high open interest with low volumes led to long liquidations of $855 million (or $661 million net of short liquidations), the highest amount since at least the FTX debacle. For context, the amount of long liquidations during the March US mid-sized banks crisis did not top $250 million in any single day.
The news that the SEC would be warming toward approving a futures-based ETH ETF sparked a partial recovery, but the short-term macro environment remains a drag and is keeping majors BTC and ETH around the $26k and $1.7k levels.
There are reasons to believe that another sharp correction is unlikely in the medium term, as about two-thirds of the open interest build-up this year was cleared last week.
On the other hand, it is also possible that volatility from here until the end of the year will be higher than it has been until last week.
The macro environment remains hazy, especially as yields keep creeping up. This week will bring some activity indicators (existing and new home sales, initial jobless claims, and durable goods orders). Still, all eyes should be on the annual meeting of the top central bankers at Jacksonhole and Powell’s keynote on Friday.
From the crypto side, the first answers from the SEC to all but one of the active spot BTC ETF applications will come over the next couple of weeks, but they are highly likely to be just delays. Perhaps more important for price action in the short term is the Grayscale vs. SEC lawsuit decision, which could drop at any time now and meaningfully shift the odds of success of the current round of spot BTC ETF applications.
Top Three Trends We're Watching
FalconX Trading Desk Color: BTC traded 2.4x more than ETH this past week, the highest ratio we’ve seen at our desks over the past three months. In general, our flow was net buyer over the past week, as we saw opportunistic buying during the most acute phase of the Thursday sell-off. Among majors, 59% of our BTC volume and 56% of our ETH volume came from the buy side. We saw relatively low interest outside of BTC and ETH, as the two majors traded 2.5x more than alts, the highest ratio over the past eight weeks. Our alts flow was very evenly distributed, except for some names (such as DOGE, BCH, and CRV), where we saw more predominant sell interest.
Volatility Jumped but Is Still Relatively Low, According to Our Options Desk: The sharp pullback last week caught many by surprise. We saw profit takers on positions that directionally benefitted from the downside move or were just long volatility. Those who buy puts or collars portfolio protection also sought to unwind their put legs.
Interestingly, the volatility term structure for BTC did not show much of a change on the longer end, while the front end jumping by about 2x shows how the market was perhaps complacent with the low realized volatility. It is also noteworthy that ETH’s volatility term structure is U-shaped, implying that ETH volatility could subside over the next month before picking up again.
On the realized side, 30-day realized annualized volatility for BTC and ETH roughly doubled from the all-time lows recently recorded to 31.6% and 28.8%, which are in the lower nine and three percentiles since 2016. In other words, volatility is still relatively low despite the pickup.
New Social-Fi Application Is the Current Talk of Cryptoland: Friend.tech is an application that allows users to purchase “shares” that give them access to other users through a private chat. It has achieved over 80,000 unique subscribers since it opened its invite-only beta less than two weeks ago and generated over $1 million in fees over the past 24 hours. For context, TokenTerminal data shows that the only two Ethereum applications that are currently able to garner $1 million or more in fees per day are Lido and Uniswap.
Will friend.tech succeed despite similar previous attempts such as bitclout and rally failing to get sustainable traction?
Only time will tell. The new application’s main differentiators seem to be a more aggressive pricing curve, which could be the reason behind the stratospheric rise in activity but raises questions on its sustainability, and backing from prominent crypto venture capital firm Paradigm.
Whatever the case, this space is worth watching. Crypto-enabled social media monetization models could become a new use case we are only beginning to take a crack at.
From a broader perspective, seeing such a successful application gain meaningful traction without congesting the underlying blockchain network is encouraging. This of course comes on the back of the development of Ethereum’s L2 scalability solutions: Friends.tech is built on top of Base, which is Coinbase’s L2 chain that uses the Optimism stack.
Ethereum L1 fees since friends.tech launched on August 10 are 25% lower than the average for the year until then, which is in stark contrast to the times when the success of early NFT application CryptoKitties or the latest Yuga Labs NFT drop would commonly temporarily clog the Ethereum network.
Have a great week!
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