The Derivatives Magazine #19
The expected US Federal Reserve meeting on Wednesday is expected to end with a significant increase in the refinancing rate. The statistics released last week do not leave officials much room for action. While a month ago, in mid-August, traders' expectations were split almost equally between a 50bp and 75bp hike scenario, at the moment the choice is between 75 (which 90% of CME derivatives traders are leaning towards) and 100bp. This change in market sentiment is logical, given that the core CPI rose by 0.6% - an indication of how the key index categories (fuel and real estate) are still subject to inflationary pressures, despite the overall slight decline in inflation. Accordingly, inflation is likely to be more lingering, which would have a natural impact on the Fed's rate hike policy.
This final reassessment of global sentiment has primarily affected the stock market and the cryptocurrency market. In the week since the release of the statistics, total crypto market capitalisation has fallen by 17% and has now settled at around $860 billion.
Another wave of sharp declines in the prices of the major assets, ETH and BTC, has led to much larger liquidations than the previous week. On Sunday and Monday, about $400 million worth of positions were forcibly closed. Most of these were long positions (around 85%), while more than half of the liquidations were related to ETH. After the successful completion of The Merge, the last strong stand-alone reason for local growth has been realized. Profit taking on the part of short-term traders led to a much larger decline and consequent liquidation volume.
In the run-up to the US Federal Reserve meeting, activity in the futures market remains strong despite a general fall in prices. The situation with the funding rate tends to be normalised, ranging between 5% and -40%, although the average rate for ETH over the last seven days has fluctuated around 90% across the five largest exchanges, according to the analytical service laevitas. Volatility in recent days has also affected BTC - the funding rate is at atypical levels of -10% to -25%, indicating significantly stronger bets for long-run price declines in the short term.
Trading volume in September futures contracts increased significantly amid the liquidations of recent days, with increases of more than 200% in the last 24 hours on some exchanges. Compared to open-ended contracts, funding rates are in a much narrower range of 0% to -5% for both Ethereum and Bitcoin.
Open interest in Ethereum futures contracts declined by 15%, as the sharp drop in price and subsequent liquidations reduced the total amount of open trades to 6.6 billion. At the same time, open interest in BTC futures, though down to the 11.5 billion mark, fell by only 4% in percentage terms. It appears that after the Merge, the drivers for a standalone move in ETH are exhausted, and bitcoin is back at the top of the trading dynamics category.
The sharp drop in Ethereum's value, which outperformed the cryptocurrency and stock market averages (- 27% in the week from 12 September), brings attention to decentralised loan and deposit metrics. Within the last cycle of price declines (at the beginning of summer), these indicators were amongst the benchmarks for price movements and in the moment led to attempted price attacks. Since the end of this period, the industry has become aware of quite a few forced liquidations by large investment and trading companies. Should the current downtrend intensify, a repeat of this scenario cannot be ruled out. At the moment, the bulk of ETH liquidation prices are in the $450 to $850 range, and in the event of a sharp drop in spot prices to those marks, additional pressure on the market is possible, threatening a succession of cascading liquidations.
However, in general, there is not as much fear and apprehension in the market as there was at the beginning of summer. The policy of tightening of monetary conditions by central banks has already led to a significant washout of liquidity from the market. At the moment, the strongest players who have been tested by high volatility and a prolonged period of unfavourable macro environment are "in business", and it will not be as easy to liquidate their positions as it is for other bankrupt companies.
This overview was prepared by the analytics department of the Biqutex crypto derivatives exchange