The Weekly 247

Volatility picks Up, Creating Opportunities for Smart Risk Taking in the Near Future

The Market - Be Careful What You Wish For

Just as we discussed the low volatility environment for crypto last week, volatility made a significant comeback. On August 18th alone, BTC dropped by 9%, culminating a week-over-week performance of -11.31%. Negative news surrounding Evergrande’s bankruptcy filing – the second largest Chinese real estate developer – and rumors that SpaceX liquidated its entire $373M BTC holdings have been linked by some with the selloff. However, BTC futures trading data suggests that the long squeeze, triggered by the $400M long BTC futures liquidation on August 17th, might have been the primary cause.

As the chart below illustrates, the 14-day RSI for BTC has fallen below 30 for the first time this year, suggesting a potential oversold condition. The implied volatility of BTC spiked to 55 on August 17 but rapidly decreased to 45. However, it hasn’t reached this year’s peak of 76 yet. We anticipate sustained volatility into the fall, the next key support level to monitor is around $25,000, which corresponds to the local trough reached in June 2023.

ETH fared slightly better than BTC, experiencing a roughly 10% week over week. Other segments of the crypto market saw similar sell-offs, as reflected in CoinDesk’s sector indices.

There are several major macro events to watch that could impact the price of BTC and ETH in the coming months:

1. FOMC Meeting on Sep 19-20: Based on the July FOMC meeting minutes released last week, the Fed perceives an upside risk in inflation that may influence their rate decision. The interest rate futures market currently assigns a 11% probability to a 25bps rate hike in September, a slight increase from the previous week. We will be closely watching Powell’s speech at Fed’s annual economic symposium on August 25 for more information.

2. Potential Ruling of the Grayscale vs. SEC Lawsuit: A ruling is anticipated before the end of August with the DC circuit law clerks’ schedule. While a ruling in Grayscale’s favor doesn’t directly imply approval for a BTC spot ETF, it could be interpreted as a positive sign in that direction.

3. ETH Futures ETF Launch: The first ETH futures ETF is slated to launch in October without SEC blocking according to Bloomberg. The development might bolster arguments against ETH being classified as a security, especially since CME certified to the CFTC that ETH futures weren’t security futures upon their initial listing in February 2021. For context, the first BTC futures ETF, launched in October 2021, accumulated approximately $1B in just two days, setting a record as the quickest ETF to achieve this milestone. Observing the rate at which this new ETH futures ETF attracts assets will offer insights into mainstream market demand for crypto.

Notable CeFi Developments

Coinbase has secured approval from the National Futures Association (NFA) to become a Futures Commission Merchant (FCM). This development is significant for two primary reasons:

1. Increased Liquidity in Crypto Derivatives:  Most of the existing 60+ FCMs are banks. However, strict capital requirements pertaining to crypto, combined with the overarching bank oversight, have curtailed banks’ appetite for engaging in crypto derivatives transactions. The constrained balance sheets of FCMs, particularly after BITO’s success, have led to delays in the launch of other BTC futures ETFs. As a crypto-native, non-bank FCM with its own derivative exchange, Coinbase is uniquely positioned to foster deep liquidity and provide competitive trading margins for clients. 

2. Positive Regulatory Milestone: This approval represents a crucial regulatory milestone for both Coinbase and the broader crypto market. A FCM’s relationship with the CFTC is akin to a regulated broker-dealer with the SEC. This highly selective group plays an essential role in the US derivatives trading infrastructure. Such endorsement highlights both Coinbase’s capacity to meet stringent regulatory standards and the CFTC’s openness to create a clear compliance trajectory for crypto native entities. This stands in contrast to the SEC’s “regulation by enforcement” approach. Nevertheless, crypto is here to stay and US clients now have a compliant avenue to engage in derivative trading for BTC and ETH. This development will inevitably bring depth and maturity to this market.

Notable DeFi Developments

While most of the market participants have been focusing on broad market sell off this week, select protocols are witnessing impressive rallies as their product development efforts pay dividends. For instance, RUNE, the native token for Thorchain—a cross chain DEX—rallied approximately 30% last week. Ever since introducing the Streaming Swap concept on August 1, its daily trading volume has surged from around $10-15M in July to $50-100M by mid-August. The Streaming Swap feature breaks up large cross-chain trades into smaller chunks that are executed over a span of up to 24 hours. This is Thornchain’s approach to implementing a TWAP trade to minimize market impact. On August 15, Thornchain processed its largest-ever swap - roughly $3.65M from ETH to RUNE—owing to the streaming swap capability. Rather than  obliging traders to manually divide large trades into smaller swaps (which necessitates executing multiple on-chain inbound and outbound transactions, resulting in elevated gas fees), Thorchain has automated the process and amalgamates them into a single in-bound and out-bound transaction.

Currently, Thorchain stands as the only cross-chain DEX enabling the swapping of native tokens across multiple chains. Its primary competition stems from centralized exchanges (CEXes) rather than other DEXes. By introducing the streaming swap, Thorchain can now rival CEXes in executing larger trades. Despite the recent rally propelling RUNE into overbought territory, it’s evident that there is ample growth potential for DEXes as they evolve to mirror features offered by their CEX counterparts. Two notable trends to monitor in the DEX arena are:

1. Improved trade execution: Enhancements such as liquidity aggregation, algo trading, refined AMM models and the emergent Central Limit Order Based (CLOB) DEX can elevate DEX liquidity and execution, making them competitive with CEXes.

2. Enhanced user experience: Cross-chain trading is currently more straightforward on CEXes. Moreover, CEXes typically provide staking and derivative trading under one umbrella, simplifying the process for users. This opens opportunities for DEXes to evolve into comprehensive one-stop platforms.

It is noteworthy that DEXes are among the most mature applications in the crypto space. While Uniswap's trading volume is comparable to Coinbase, the aggregate trading volume of DEXes still lingers below 20% of that of CEXes. Sustained development in the DEX realm is key to bridge the chasm between TradFi and DeFi.

On the infrastructure front, L2 TVL continues to grow in ETH terms, marking a 7-day growth rate of approximately 4.6%. The competition between L2 solutions, often referred to as the  “L2 wars”, is intensifying. Immutable, the Web3 gaming development platform, has just activated its Immutable zkEVM testnet, which exists alongside Immutable X, another game-specific ZK roll-up. Immutable zkEVM is EVM compatible and supports Solidity programing, which is considered as more developer friendly compared to Immutable X. The DeFi borrowing and lending protocol, Notional Finance, expressed their preference for Arbitrum based on its overall traction, product and user base, highlighting their affinity for yield. 

Although layers 2s can significantly reduce Ethereum’s transaction costs, there are two primary concerns associated with them: 

1. Centralization of Sequencers: The sequencers, responsible for ordering transactions in batches before dispatching them to Ethereum, are all centralized. This represents a tradeoff between speed and decentralization. 

2. Interoperability: while bridges between L2s might be more secure than those between L1s, as long as we use multiple L2s,  a cross-chain bridge remains essential. For users prioritizing scalability over specific implementations, they need a reliable method to transfer assets from Ethereum to L2 and between different L2 solutions. 

The complexities surrounding L2s suggests there’s still potential for L1 chains to expand. For instance, dYdX opted for Cosmos due to concerns over sequencer centralization. Solana promotes its monolithic approach to blockchain implementation over a modular one, and its recent developments in compressed NFT demonstrate its ability to substantially reduce transaction costs through state compression. I believe we are headed toward a multi-chain future. Consider blockchains as nation-states, providing the security and infrastructure necessary for applications to be built upon them. The decision lies with dApps and hinges on factors like security, speed, decentralization and culture nuances, which ultimately reflects the ethos of the developer and user communities.

Trends to Watch

Higher volatility heading into the fall might present opportunities for well-informed risk taking. Using historical performance as a guide, the trajectory since the 2021 ATH appears to mirror previous cycles from 2013-2017 and 2017 to 2021. The anticipated BTC halving in April 2024, coupled with potential mainstream adoption spurred by a possible BTC spot ETF approval, could act as positive catalysts for BTC price in the short term. 

Drawing a parallel to the internet’s evolution from dial-up to broadband, blockchain scalability solutions have the potential to unlock considerable growth in blockchain applications. While much focus is currently on L2 development, we see promise in bluechip dApps. They stand to benefit from broader user adoption due to reduced costs and improved user experiences. Furthermore, as risk appetites revive, capital is anticipated to shift from BTC and ETH to altcoins with promising use cases.

Weekly Gainers and Losers

Bluechip dApps appeared on both the top gainers and losers list this week. Similar to Thorchain, Hedara’s rally is driven by positive news that FedNow has added a Hedara based payment platform as a service provider. The sell-offs in COMP, LTC, SHIB and UNI are likely driven by their high beta nature to BTC, given their relative liquidity.

Top 100 (7d %):

1. THORChain (+31.69%)

2. Akash Network(+20.12%)

3. Hedera (+8.46%)

4. Injective (+0.66%)

5. GUSD(+0.62%)

Bottom Top 100 MCAPs (7d %):

1. Conflux (-27.56%)

2. Compound (-22.57%)

3. Litecoin (-22.09%)

4. Shiba Inu (-20.92%)

5. Uniswap (-20.47%)

About Decentral Park

Decentral Park is a founder-led cryptoasset investment firm comprised of team members who’ve honed their skills as technology entrepreneurs, operators, venture capitalists, researchers, and advisors.

Decentral Park applies a principled digital asset investment strategy and partners with founders to enable their token-based decentralized networks to scale globally.

The information above does not constitute an offer to sell digital assets or a solicitation of an offer to buy digital assets. None of the information here is a recommendation to invest in any securities.