Your Monthly Brief into the World of Digital Assets
LEVERAGE IN THE CRYPTO MARKET
- What happened to Celsius?
- What happened to 3 Arrows?
- Crypto projects
LEVERAGE IN THE CRYPTO MARKET
Since most of Bitcoin leverage positions are held in-kind, Bitcoin OI moves closely with BTC price. This means that the dollar value of an OI position naturally increases or decreases following the price action of its underlying:
This is why looking at dollar values of Open Interest is not enough to identify an overleveraged crypto market. One would need to compare the rate of change in BTC price with the rate of change in OI instead. In the graph below, areas north of zero (highlighted green) point at periods of leverage accumulation, whereas red areas indicate ongoing closing/liquidation of leveraged positions:
Leverage has been actively entering the market in the last week. But are derivative traders placing long or short bets? Funding rate is the answer:
Ever since Celsius paused withdrawals on June 13, BTC funding rates have been predominantly negative, indicating short position traders are dominant and shorts are paying longs. In a normal market environment we would argue that such extreme bearishness amongst derivative traders could be a build up for a short squeeze (the likes of which we had seen end of July 2021). However, current macro environment does not show any signs of relief. Remaining in delta neutral strategies and avoiding large directional bets is prudent.
In 2021, American VC-backed companies raised $329.9 billion. This is a nearly 100% increase over the record-breaking $166.6 billion raised in 2020. (Link) We could see the same trends unfold in the crypto space. As Highlighted by Galaxy Digital Research, “venture capitalists invested more than $33bn into crypto/blockchain start-ups in 2021, more than all prior years combined. Crypto/blockchain start-ups received almost 5% of venture capital deployed in 2021… Even though valuations are at all-time highs across the entire VC landscape, the median pre-money valuation for crypto/blockchain start-ups was a whopping $70m in Q4,2021–141% higher than the $29m seen across all of VC.”
Investing 101: If interest rates rise → discount rate for future cash flows increases bringing the PV lower.
The secondary impact applies to Valuation Ratios and we can see a strong relationship between the Shiller CAPE ratio (10Y inflation adjusted P/E ratio) and US interest rates. When interest rates rise, valuation ratios compress.
The key here is we may see both Valuation Ratio compression but also the E = Earnings side of the equation within P/E fall as earnings are impacted by inflation and slowing economic growth. Declining earnings may have a double impact on stock market prices, and in combination with multiples compression create a bearish scenario for stock prices. As long as crypto continues to trade as a risk-on asset, it is likely we will see further contraction in the next few months both in crypto prices and VC valuations.
What happened to Celsius?
Celsius is a US based crypto borrowing, lending and trading platform offering among the highest yields on lending and lowest loan rates on borrowing in the ecosystem. To meet interest rate expectations while ensuring low rates on loans, Celsius is using lenders deposits to invest in risky strategies such as institutional lending, DeFi protocols and staking. To put it bluntly, lenders would give out their savings and earn a yield without ever asking what Celsius would do with their money as long as the promised interest rate was received.
Due to these unsustainable yields, along with other platforms like BlockFi and Voyager, Celsius fell under the scrutiny of the SEC. While BlockFi was fined $100 million, Celsius avoided financial penalties by limiting its high reward program in the US to accredited investors only. It resulted in massive withdrawals from retail investors seeking to find similar rates on other platforms that have not been restricted yet. Then, due to the macroeconomic turmoil and the collapse of the LUNA ecosystem, the market crashed. While Celsius was little concerned by UST depeg, the platform was affected by those claiming Celsius had a significant exposure to its ecosystem and was secretly insolvent. In fact, even if Celsius’ financial stability was supposedly guaranteed, FUD initiated an outflow of billions of dollars.
Then, Ethereum delayed to the difficulty bomb which hinted that the merge would be once more delayed. The difficulty bomb is supposed to incentivise miners to switch to proof of sake by exponentially raising mining difficulty once it will be detonated. Such bad news in the current environment triggered a massive selloff of stETH which lost its peg to ETH. stETH is a token given for each ETH staked on Ethereum beacon chain via the Lido protocol. For platforms like Celsius who need to honour high yield rewards to their users, stETH is a great investment opportunity as it generates income through staking but can still be traded on exchanges. In fact, Celsius converted 70% of all its users’ ETH into stETH. However, one stETH can be redeemed for one ETH only once the merge will be completed. Celsius was not able to convert its stETH to ETH. Therefore, when stETh price crashed, some believed that Celsius will be liquidated on its loans collaterised by stETH. It was then assumed that Celsius could become insolvent and incapable to honour users’ withdrawals. It triggered a massive bank run on Celsius who was obligated to pause withdrawals on its platform. Whether if it was because of the FUD or the depeg, or both, Celsius is now indeed insolvent. Celsius therefore proceeded to massively sell its assets to raise more funds, crashing the price of many tokens and worsening the current bear market.
What happened to 3 Arrows?
3AC is one of the many victims of Terra’s collapse domino effect. The fund had a large exposure to the ecosystem. It was one of the leading investors in LFG capital raise that was supposed to fund massive purchase of BTC to protect the UST peg. 3AC bought $556.9 million of LUNA that are now worth less than $1000. Following LUNA’s crash 3AC was still solvent but it was a matter of time before the cascade of events triggered by the market collapse caught up with 3AC.
One of these cataclysms was Grayscale Bitcoin trust ever growing discount. Back when Bitcoin ETFs were not allowed, Grayscale Bitcoin Trust was one of the very few ways for institutions to get exposure to Bitcoin. Therefore, it traded at a premium for years and was a great arbitrage opportunity for crypto funds like 3AC. Now that many ETFs have been approved and there is less demand for Grayscale trust, GBTC is trading at an all-time high discount of more than 30% below BTC price. Therefore, 3AC had to give up on this investment strategy to cut losses and close all its positions.
The last event that unveiled the true nature of 3AC poor risk management was stETH collapse mentioned in Celsius breakdown. 3AC was one of the funds that dumped massive amounts of stETH, worsening even more its depeg to ETH. In the days that followed their 22,000 stETH sell out the crypto community understood how degen was 3AC treasury management mixing unreasonable level of leverage, highly risky investments and lack of transparency. 3AC has now debts they can repay and legal pursuit on their hands. Now, 3AC collapse might have its own dominos effect and notably in projects where the fund invested. 3AC participated to many seed rounds of major crypto projects like Avalanche, Near, Polkadot and Solana. In the event 3AC files for bankruptcy, all its assets will be sold on the open market as soon as the token are unlocked, ultimately crashing their price.
As the dominos kept falling, Voyager, a crypto broker exposed to 3AC had to lower withdrawal limits on its platform by more than half. The fund owes $720 million to the brokerage platform, and it is in no capacity to honour its debt. Voyager imposed a deadline for repayment that has not been respected. Consequently, the crypto broker issued a default notice to 3AC and had to accept a loan from Alameda to secure its assets. Voyager Digital shares (VOYG) that experienced a steep decline from November highs, down 94% from ATH, lost another 73% of their pre-event value following the news. Alameda loan dispersed the FUD and shares have now slightly recovered.
· JP Morgan reiterates that Bitcoin is undervalued. According to the banking giant, its fair value stands at $38,000, a 31% increase from current price. (Read More)
· BGC Partners Expects to Launch Crypto Exchange by 2023 Q1. (Read More)
· Solana’s Biggest DeFi Lender Almost Got Rekt. (Read More)
· Goldman Cuts Coinbase to ‘Sell’ Due to Fall in Crypto Prices and Industry Activity; Shares Drop. (Read More)
· Coinbase to shut down Coinbase Pro to merge trading services. (Read More)
JKL Group (“JKL”) set to become dominant force in Bitcoin mining as they enter industry with landmark Texas project.
The first facility in Texas will host over 10,000 machines or 35MW and is scheduled to go live in July 2022. Targeting a total investment over USD 60 million, the company plans to rapidly build out to 85MW of capacity by the end of 2022 and scale to over 250MW in 2023.
“After China’s regulatory reforms on Bitcoin mining in 2021, we launched JKL Mining to leverage the opportunity and bolster our products and services to the blockchain industry,” Jingyuan Ye, Co-Founder and Chairman of JKL Group, says. “Headquartered in Hong Kong, JKL was already tactically positioned to serve as a gateway between China and the rest of the world,” he adds.
· The Middle east is starting to gain interest in BTC mining using excess natural gas. Crusoe Energy, a US start-up using wasted natural gas to power BTC mining, received investments from Abu Dhabi and Oman investment authorities. (Read More)
· Bitcoin miners are selling off their BTC holdings to cope with market headwinds. (Read More)
· First trader ever to be charged with insider trading of digital assets in the US is an ex-exec at Opensea. (Read More)
· Japan Passes Landmark Stablecoin Bill for Investor Protection: Report. (Read More)
· New York state releases guidance for issuing dollar-backed stablecoins. (Read More)
· New crypto bill proposed by key US Senators would make purchases under $200 in cryptocurrencies tax-free. (Read More)
· Powell Is Focused on Curbing Inflation, Even at the Risk of Provoking a Recession. (Read More)
· Grayscale Sues SEC Over Bitcoin ETF Application Rejection. (Read More)
· Solana price drop is due to yet another halt of its network due to cold storage transactions named “durable nonce transactions”. (Read More)
· Yuga Labs discord has been hacked, resulting in a loss of 145 ETH. Discord as a tool for community management is being challenged due to recurrent security issues. (Read More)
· Chainlink Price Feeds Now Live on Solana. (Read More)
· Ethereum merge is near. Testnet transition to POS have been successful. (Read More)
· Despite stablecoins’ bad press recently, their marketshare is reaching new highs. (Read More)
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