May 18
A break after the storm on the crypto market
Last week saw another sensitive “hit” to the crypto market. The week started with the total cryptocurrency market capitalisation index at $1.475 trillion. From the beginning of the week, the index began to decline rapidly and after 2 days we could see the index at its lowest value since mid-July 2021 — $1.125 trillion. Then, the decline compensated by about 55% to $1.305 trillion. The index stayed sideways for the rest of the week, ending the week at $1.3 trillion.
“Digital gold”, aka Bitcoin, started the week at the 33 100 price level. The week was already behind the dive and many market participants had hopes of a reversal. However, another round of developments in the UST/Terra situation caused additional panic in the market, and the rate of the “first cryptocurrency” (a large amount of which was in the reserves of the Terra project) fell to 26 220. It stayed at about 28 760 to 31 350 for the rest of the week before stopping at 29 900. As Terra’s management claims that almost all of the BTC in its reserves (amounting to about $3 billion) have been sold, we can assume that from now this pressure factor on the Bitcoin price has been removed (which does not rule out further declines, because others remain).
In the case of Etherium, the price dynamics were virtually the same: a start at 2400, a local dip to 2200 and a recovery to 2450 in the first days. We could then see a sharp drop to 1790 (the last time such numbers were a year ago) and then a recovery and sideways movement in the range of 2150–1955 for the rest of the week. The week ended at 2025.
News
The big news of last week, of course, is the situation with the once blue-chip DeFi Terra/Luna. The UST steblecoin price dropped to $0.11, while the native Luna token collapsed to five decimal places (capitalisation was below $300 million). All this happened against the backdrop of a monstrous issue of Luna token, whose total supply rose to 6.9 trillion tokens (users have already called it a new “meme-coin”). After that, many exchanges curtailed trading of Luna, and the asset in turn became purely speculative. Terra blockchain founder Do Kwon first published a preliminary proposal that talked about restarting the blockchain and distributing 1 billion new tokens mostly to Luna and UST holders until “hacking” occurred. Afterwards, he fleshed it out by creating a “fork” of the network (a new copy) and dropping new tokens to current holders. Kwon suggested calling the old network Terra Classic. Most of the Terra community strongly opposed the proposal. Also unknown is the fate of the $1.2 billion in bitcoins that were in Terra’s reserves.
Trading company Robinhood plans to release a new cryptocurrency wallet focused on decentralised finance (DeFi) by the end of 2022. Robinhood CEO Vlad Tenev announced the “Web 3 cryptocurrency wallet” at the PermissionLess conference in Palm Beach. Users of the wallet, completely segregated from the company’s other Web 3 platforms, will be able to lend, stack and farm, and buy NFT — just like the MetaMask wallet. These features are missing from the previous Robinhood wallet. It is not yet clear which blockchains the new wallet will support.
The founder of UK fintech company Revolut, Nikolay Storonsky, is about to launch his own artificial intelligence venture capital fund. The new company, named QuantumLight Capital, will have $200 million in funds under management, which will be provided by Storonsky and other investors. According to the company’s website, the project team includes founders of unicorn technology companies, quantum traders, scientists and engineers in the field of artificial intelligence. The fund will identify investment opportunities using a solution called Aleph as its “proprietary quantitative decision-making engine”.
Coinshift, an Indian crypto start-up that provides treasury management tools for DAOs and web3 firms, has raised $15 million in Round A, and plans to expand into new blockchains. Tiger Global led the round, which also included Sequoia Capital India, Alameda Ventures, Spartan Group, Ethereal Ventures, Polygon Studios and others. The angel investors include Ryan Hoover, founder of Product Hunt and Weekend Fund, Shiva Rajaraman, vice president of operations at OpenSea, and Prabhakar Reddy, founder of FalconX.
Market situation
After the epic collapse of the Terra(Luna) ecosystem and the local UST steblecoin, it’s time to take a quick midterm recap. The bottom line is that 80 000 bitcoins that served as collateral for the new Korean crypto-dollar counterpart were spent (sold on exchanges) in an unsuccessful attempt to keep the peg at a 1-to-1 rate and depleted total reserves by more than $2.4 billion in 3 days. In addition, the liquidation of such a large position on the spot market led to a fantastic realised volatility of over 150 points for BTC. The timing of the attack, as well as the method and amount of funds raised, suggests that a large trading desk on the level of Citadel or Goldman Sachs was involved.
An event of such scale (liquidation of an ecosystem of more than $20 billion) could not help but affect the entire market. One of the most important stablecoins, USDT, lost around 10% of its value in the moment on panic sell-offs and exits by large traders into the original dollar. As a result, despite the fact that the minimum BTC amount was as high as 26 000, some positions were liquidated at 23 600 due to a breach in the rate peg, which led to additional losses. As a result, about $7 billion was withdrawn from USDT, some of which flowed into another USDC stack. For now, the crypto market has stabilised, but the outlook remains dim.
Put options trading continues to dominate the options market. Traders are still not expecting a major market reversal, only a possible short-term correction in June. The sharp declines in the previous week led to increased interest in trading 15 000–20 000, 25 000 put options with expiry dates in late May and June. Alternatively, there were several large call option trades with a strike date of 32 000 at the end of June.
Block (two or more) option trades are concentrated around trading hedging positions for the next two months using a put spread of 30 000–25 000. With this design, one option trade is financed by a premium from the sale of options. Given the most active levels, the traders’ expectation can be interpreted as an anticipation of rate volatility decreasing and being in a corridor.
Last week was the most eventful week in terms of price movements. After such strong moves there is usually a relative pause, which is very convenient for sellers of volatility or for entering or developing market positions. The news calendar leaves little room for sharp moves and leaves one to assume that the biggest drops have already happened. At least in May…
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