Hello and welcome to the FT Cryptofinance newsletter
Crypto markets are used to volatility but, even by their standards, this week was a rollercoaster.
The prices of bitcoin, ether and solana suffered their sharpest falls since the market’s crisis in the summer of 2022. Unlike two years ago, this wasn’t a mess of the industry’s own making, but instead part of the wider market maelstrom as fears over tech earnings and a potential US recession, plus an unwind of leveraged trades, drove huge moves in global equities, debt and currencies.
Here’s some takeaways from this week’s action:
1. The market was getting too frothy for some
July had been a propitious time for crypto. Patient creditors at Mt Gox and Genesis received good news about getting their long-awaited payments and there was bullish talk of a crypto “Trump trade”, based on the idea that a Donald Trump presidency would usher in a more welcoming environment for digital assets.
The upbeat mood was underlined by interest in bitcoin perpetual futures rising to more than $11bn, near an all-time high. That suggested “that new capital was entering the market”, said analysts at Kaiko, a data company.
Bitcoin funding rates, a measure of the direction of traders’ collective positions, were still positive, indicating the market was betting on further gains. After Trump’s speech at a bitcoin conference two weeks ago, the coin touched $70,000, close to its all-time high.
But, under the surface, the make-up of the rally was changing. While retail investors remained enthusiastic, momentum traders such as commodity trading advisers had for weeks been exiting their long positions and started building up short positions, according to JPMorgan, in a sign of potential trouble ahead.
2. Trading on crypto markets remains very uncomplicated, for better or worse.
Come the downturn and people raced for the exit. Typically, traders go where the liquidity is in order to sell as quickly as possible. That was true again here. Centralised exchanges had their second-highest volume day of spot trading since May 2021 when China banned bitcoin mining, according to CCData.
A common feature of leveraged trading is the level of liquidations, when a crypto exchange automatically begins selling some of the customer’s bets if the margin they have supplied is not enough to cover losses on the trade. There was just over $1bn of liquidations over a 24-hour period, the highest total since early March, Coinglass data found.
But here’s the thing: when liquidations exhausted themselves, sentiment flipped and people moved in. FalconX, a crypto broker, said “pretty much all” of its customers — prop desks, hedge funds, venture funds and retail aggregators — jumped in to buy the dip. Binance had a net inflow of $1.2bn in the day after the selling abated as customers moved funds into accounts on the exchange.
Crypto markets such as bitcoin lack the sort of volatility-damping products such as short futures exchange traded funds and risk-parity that are common in equities. Automated liquidations are controversial in that they tend to exacerbate declines, making it even more painful for customers. It’s a type of forced selling and played out in public. But one person’s pain is another’s gain and a slowing rate of liquidations becomes a crucial signal in itself.
3. For now, spot ETFs amplify the market signals rather than muffle them
The arrival of spot bitcoin ETFs in the US has transformed the daily trading volumes of bitcoin. However, they haven’t yet had much effect dampening volatility despite what some crypto analysts may think.
David Lawant, head of research at FalconX, points out that bitcoin volumes, in spot and futures, over the weekend were marginally lower than during Trump’s bullish bitcoin Nashville speech a week earlier. The real wave came when the US stock market opened on Monday. Spot bitcoin ETFs experienced their largest net outflows since they were launched in January, JPMorgan noted.
Not only does it underscore that trading bitcoin is increasingly an activity done during the trading week rather than at weekends, but also that much of the market still regards it as a speculative “risk-on” asset. Tech stocks sold off as they failed to hit the market’s stratospheric earnings forecasts and the yen carry trade partially unwound. Crypto fell into the same basket.
ETFs may never damp the volatility. Alex Thorn, head of research at Galaxy Digital, argued that bitcoin was a bet on an uncertain future. Bitcoin didn’t trade like a store of value, like gold, because “it isn’t widely held for this purpose (yet)”, he said. “The bitcoin bet is that it may become widely held for this purpose?.?.?.?Think of it like an early-stage bet on the future of gold, in this thesis. What if you could be ‘early’ to the future of gold?”
4. It ain’t over till it’s over
If the price of bitcoin is interlinked with other asset classes then what happens elsewhere matters. The Vix volatility index has been becalmed all year, a trend Nomura strategist Charlie McElligott put down to the market becoming complacent that the US would not suffer a recession as interest rates tightened. While off its Monday peak — the highest level since the early stages of the coronavirus pandemic — the Vix has not returned to its year-to-date average of around 14 points.
Could some bitcoin investors be too complacent that the worst is over? Nikolaos Panigirtzoglou, an analyst at JPMorgan, pointed out that many investors were still bullish, based on rising open interest on the CME and the direction of futures bets.
Crypto has its own Vix equivalent, Deribit’s DVol indices, which are compiled from trades made by professional traders such as hedge funds and prop traders.
The DVol indices for bitcoin and ether are still above their average for the year, especially for ether.
Few think equity markets are out of the woods yet. Market positioning indicates the professionals still expect another shake-out for crypto this month.
What’s your take? Email me at philip.stafford@ft.com
Join Robert Armstrong, chief US financial commentator, and FT colleagues from Tokyo to London for an August 14 subscriber webinar (1200BST/0700EST) to discuss the recent trading turmoil and where markets go next. Register now and put your questions to our panel.
Weekly highlights
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Ripple Labs was ordered to pay a penalty of $125mn for improperly selling its XRP token to institutional investors. The total was a fraction of the $2bn that US market regulators had sought but well in excess of the $10mn Ripple had argued it should pay.
Soundbite of the week: the Trumps, pumps and dumps
The other story of the week is about the sons of Donald Trump and crypto. On Tuesday DJT, a coin that infamous pharma executive Martin Shkreli claims to have co-created with Trump’s youngest son Barron in June, dropped 90 per cent in seconds with a single deal. On X, Shkreli appeared to blame Barron.
But the more intriguing story is yet to be fully told.
Donald Trump’s sons, Eric and Donald Trump Jr, posted on X on Wednesday that they were “about to shake up the crypto world with something HUGE. Decentralized finance is the future — don’t get left behind. #Crypto #DeFi #BeDeFiant.”
This triggered speculation there would soon be a Trump-themed coin. Attention focused on a new token called Restore the Republic, which soared to a market capitalisation of $155mn. That lasted till Eric Trump squashed the rumours the following day.
Friends: Beware of fake tokens! The only official Trump project has NOT been announced! You will hear it here first.
Two tokens, two 95 per cent falls in a week.
Cryptofinance is edited by Laurence Fletcher. To view previous editions of the newsletter click here
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