Weekly Market Update #21
Market wide leverage cascade as ETF decision deadline now less than 10 days out
Note: This bulk of this weekly update was written yesterday (1-2-2024) and distributed to eToro’s userbase through our collaborative series. In the time since, the market has undergone a leverage cascade, which we touch on towards the end of this report.
Major crypto developments for the week:
Bitcoin ends 2023 up 155%, fifth best year of all time
Now less than 10 days out from final Bitcoin ETF deadline
JPMorgan, Jane Street, Cantor Fitzgerald named authorized participants in updated ETF filings
Bitcoin’s 3-month futures basis breaches 20% annualized as perpetual funding rates breach 80% annualized
Microstrategy purchases additional $615 million of Bitcoin
Hong Kong regulators set to approve spot Bitcoin ETF applications
Bitcoin inscriptions have now generated over $225 million of fees for the network
Ethereum restaking protocol Eigenlayer surpasses $1 billion of total value locked within 48 hours
Orbit Chain loses $81 million in blockchain bridge exploit
Bitcoin ends 2023 up 155%
With 2023 ending, Bitcoin posted its fifth best yearly price performance of all time. The chart below shows yearly candles for the leading digital asset.
Top Performers of the Week
Top performers of the week include BSV, ICP, SEI, FIL, MINA, ATR, PERP, and SKL.
Now less than 10 days out from final Bitcoin ETF deadline, issuers re-file with authorized participants
With less than ten days until the final deadline for the SEC to make a decision regarding numerous Bitcoin spot ETF filings, this week we saw further developments within re-filings from multiple issuers. Blackrock’s latest filing includes traditional finance behemoths JPMorgan and Jane Street as authorized participants. This enables the firms to create and redeem shares of their ETF, if approved. Senior ETF Analyst at Bloomberg Balchunas commented on the move stating: “Just to be clear: the AP names weren’t due in S-1s, so BlackRock adding them in there is a bit of a flex in that regard. So if we see other S-1s not naming AP doesn’t mean they don’t have one lined up. But this does make BlackRock the first horse officially ready in my opinion.” Meanwhile, WisdomTree also cited Jane Street as an authorized participant, Valkyrie cited Jane Street and Cantor Fitzgerald as authorized participants, and Invesco cited JPMorgan and Virtu as its respective initial authorized participants. These developments show a continued increasing probability of approval, although all there is to do now is wait until the deadline in eight days.
ETH/BTC Ratio approaches May 2022 lows
One must consider the effects that the approval will have on the ETH/BTC ratio, specifically in relation to the possible rotation that traders and funds may make into ETH.
The ETH/BTC ratio has been on a downward trend for approximately 16 months. However, the anticipated approval of the BTC ETF in the near future could offer a turning point for this trend. Traders may shift their attention towards reevaluating ETH, in expectation of the upcoming ETH ETF, as well the upcoming EIP 4844 upgrade. This scenario is reminiscent of the recent developments with BTC, where its value experienced a similar repositioning in the months leading up to its potential ETF approval.
In this scenario, ETH and ETH beta (LDO, OP, ARB) could be seen as attractive.
3-month futures basis for Bitcoin breaches 20% annualized (updated version shown at end of report)
Meanwhile, looking at the futures market we can see strong bullish sentiment from traders, reflected by the difference between Bitcoin’s spot price and the price of its 3-month futures contract. Also referred to as the annualized basis, this is now trading at over 20%, the highest reading of the last 52 weeks by far. This warrants caution around market sentiment, especially when considering that this is the longest Bitcoin has gone without a 25% correction since 2011.
Hong Kong regulators set to approve spot Bitcoin ETF applications
According to Forbes, Hong Kong financial regulators have laid the groundwork for embracing Bitcoin spot ETFs with both in-kind and cash create models. Following suit of developments in the US, this represents a potential global race to embrace Bitcoin and capital flows that may be generated around a Bitcoin spot ETF.
Ethereum restaking protocol Eigenlayer surpasses $1 billion of total value locked within 48 hours
This week highly anticipated ETH restaking protocol Eigenlayer raised its caps to 500k ETH, drawing in more than $1 billion of total value locked in the protocol within 48 hours. As a re-staking protocol, the protocol enables users to repurpose their staked ETH to extend security of other applications built on the Ethereum network.
This morning’s leverage cascade
This morning the crypto market underwent a leverage wipeout, catalyzed by a headline from Matrixport stating a high likelihood of the Bitcoin ETF filings getting denied/delayed. Shortly after we saw a multi-billion dollar unwind of futures open interest across the board. Below you can see Bitcoin’s price (top) and coin denominated futures open interest in the lower pane.
During the correction, we saw funding rates for perpetual futures cool off across the board, as shown in the funding rates heatmap for large cap crypto assets from Velo Data below:
We also saw the 3 month futures basis, which we had expressed concern about when originally writing this weekly update yesterday, draw down; now almost 10% off highs reached over the last week.
While it is difficult to time short term price movements, the futures market has experienced a healthy cleansing this morning across the board.
One of the most interesting dynamics to observe after these leverage cascades is which assets show the most relative strength; revealing what the market has the highest interest in being allocated to. After this morning’s wipeout we’ve seen assets such as SEI, ARB, LDO show noticeable relative strength.
