The Derivatives Magazine #11

After last week’s impressive gains, the market has consolidated and is trading in a range around local highs. The week’s gains amounted to around 10%, with the final capitalisation reaching the $1.05 trillion mark. The initial price momentum has been exhausted and traders are looking for the next growth drivers.

Despite the lack of a strong move, price dynamics in the current range are leading to significant liquidations of both short and long positions. After massive forced closures at the beginning of the week – 18 and 19 July, when the total amount was over $400 million, the volume has dropped to 100 million USD in total. Ethereum continues to be the main focus for leveraged derivatives traders, with liquidations three times higher than Bitcoin.

Funding rates for perpetual swaps between Ethereum and Bitcoin differ significantly. The surge in market volatility and the impressive size of liquidations has led to an uneven distribution of liquidity among centralised exchanges. Despite the fact that Bitcoin’s trading volume is roughly twice as large, cross-platform betting arbitrage for Ethereum can be four times more profitable (given the comparison between the maximum difference of +62%/-32% for ETH and +10%/-17% for BTC). The most interesting exchange in this context was OKEX, where the rate ranged from +0.5% to -32%, depending on margin collateral.

After reaching a local price peak of 24 000, BTC trading volume continued to decline to around $20 billion, with almost unchanged total open interest at $11 billion. The drop in volume to about three times of its peak coincided with the end of last weekend’s surge and was due to the lack of additional news support or a large buyer.

Trading dynamics for ETH and BTC futures continue to differ. Despite significant liquidations, the interest level increased during the week to $6.1 billion. In addition, trading volume decreased by $15 billion and, hovering around $30 billion, is well above early-month levels. For the second week in a row, Ethereum has been the driver of the broader crypto market. Such price behavior and trading volume characteristics could create a strong macro basis for further growth under favorable external conditions.

An overall balance of fund flow between public exchange wallet addresses compared between BTC/ETH/Stable wallets provides an unusual record and interesting insights from the recent growth stage.

1. Average stablecoin inflows over the first 18 days were around $30 million, with maximum inputs of $470 million and withdrawals of $360 million. A record withdrawal from the exchanges took place on July 22, totaling more than $450 million.
2. On July 21 and 22, more than 1.5 million ETH were withdrawn, totaling more than $1.7 billion.
3. For bitcoin, the corresponding figures remained within the average.

Accordingly, a large purchase of ETH was made on the spot market, which resulted in a significant amount of both Ethereum and stablecoin (potential profit) being withdrawn from public addresses. After the trade was closed and all possible combinations of short-term call options redeemed, the rise in price stopped.

At the moment, traders in the market are taking a wait-and-see attitude as the Fed meeting is ahead, where the question of a rate hike will be decided. The next meeting will only happen at the end of September, so after the final choice between a 0.75% or 1% hike (which the market estimates as a 3×1 probability) the market will get a short pause and a period without additional pressure from rate expectations.

The ongoing reporting season, which is currently progressing better than expected, as well as a bill being passed to support US microchip makers, could provide limited support for the crypto market. The positive effect of this news is tempered by reports that the SEC has launched an investigation against Coinbase, the largest US exchange, on suspicion of trading in unregistered securities (which the SEC considers most altcoins to be). The prospects for this proceeding are extremely dim in the context of two years of proceedings on similar grounds with Ripple, and could well turn in favour of the crypto market if the crypto company wins in court. However, it seems that after weeks filled with nightmarish news of blockchain bankruptcies of major crypto hedge funds and brokers, the market is no longer so sensitive to negative news, and remains cautiously optimistic instead.

This overview was prepared by the analytics department of the Biqutex crypto derivatives exchange