Written by: Yves, Head of Trading at Wirex
This is the second and most exciting part of our 2020 cryptocurrency markets review. In this article, we cover some of the major milestones that marked this year from July to December.
The rally of the second semester of 2020 was at first the consequence of the main events described in Part I: the emergence of cryptocurrency derivative options, the lower Bitcoin supply that followed the Halving event in May, the deeper slide of the Covid-19 recession.
The professionalisation of the Cryptocurrency markets eventually produced its effects as the growth of derivatives markets accelerated at the start of the second semester. Three to four years after the launch of the main crypto lending platforms, the HODLers’ search for passive income, the technological advances around blockchain interoperability, and the launch of the ERC20 Wrapped Bitcoin (WBTC), paved the way for the impressive growth of Decentralised Finance (DeFi). The parallel boom of centralised and decentralised derivatives drove liquidity to new heights, but also fuelled volatility and risk…
Our process is simple: we computed the 7-day annualised Bitcoin volatility and selected the periods of higher volatility. These periods are explained thereafter in light of the events that shook the crypto economy.
6 - August 2nd, 2020: The DeFi craze
The Bitcoin price soared by nearly 20% over the two weeks preceding August 2nd. However the larger winner was the price of Ether (ETH/USD), surfing the DeFi craze, and performing by 55% over the same time span.
The options open interest (OI) on centralised exchanges reached an all-time high exceeding $2 billion for the first time. Genesis Capital reported that active loans outstanding doubled since Q1, and total originations reached $8.4bio.
The Decentralised Finance (DeFi) craze was already engaged: more ETHs and WBTCs were locked every day in the DeFi economy. From the end of June to the end of August, 22,000 additional BTCs were tied to DeFi. New decentralised platforms like Compound offered higher interest rates than their larger competitor, namely MakerDAO. Eventually, they attracted a significant share of the total DeFI ETHs and WBTCs. The BTC/USD price momentum was given a new impulse.
However the best impulse of 2020 was yet to come…
7 - September 2nd-3rd, 2020: The miners supply pressure
The Bitcoin price loses $2,000 within 2 days.
The loss was initially triggered by the Bithumb police raid, but definitely fuelled by other external factors.
The $12,000-$13,000 BTC/USD range was difficult to overcome as we were near or slightly above the breakeven profit level of several miners. Chainanalysis recorded a continuous increase of exchange inflows that week: a clear indication of increasing selling pressure.
The severe drop that followed on September 2nd and 3rd, tested the operational risk management of the major online exchanges: Coinbase and Binance failed to secure crypto transfers for their customers at the most critical time, when market volatility was at a peak. Such crypto transfers are essential for the collateral management of derivatives positions. Indeed, a severe drop in the collateral value can trigger the liquidation of the position and drive the market further down. The transfer facility was all the more essential that the OI of derivatives markets was at record levels. Today still, the inherent leverage of the crypto-economy certainly constitutes the highest market risk.
The September correction is also in line with the one observed on the Equity markets, the so-called “Minsky moment”, as well as the one observed on Gold. The corrections were indeed aggravated by the U.S. dollar rebound, triggered by the hopes of an economic recovery as the labor market was showing signs of improvement. This improvement would turn out to be only temporary.
8 - October - November, 2020: Institutional-grade whales & Paypal
A historical performance for Cryptocurrencies
In October and November, the BTC/USD price grew by nearly 83% as large institutional-grade investors mandated brokers to build their cryptocurrency inventory.
Microstrategy and Square invested a total of $475 million in Bitcoin, initiating a race for the limited supply of BTCs. Among the publicly listed companies that followed, we had hedge funds, asset managers, payment companies, and insurers (MassMutual) investing hundreds of millions in one of the few profitable alternatives they had. Today, they are still diversifying their portfolios, allocating a single percent or less of their billions to the crypto-economy.
Institutional-grade investments are deemed long-term. They are typically announced together with ambitious developments for the investor’s specific sector.
The climax of this new wave was Paypal’s announcement of a new cryptocurrency service, available this year for its U.S. market, and worldwide in 2021. The announcement followed the grant of a DFS conditional bitlicense by the New York State on October 21st, to buy, sell and hold cryptocurrencies. The Bitcoin price jumped 7% on this announcement, and more… Data released by Mizuho Securities estimated that “one over five Paypal clients bought Bitcoin on the Paypal app” in that period!
Using the words of Grayscale’s CEO: “People will never say Bitcoin is dead. Never”
9 - November 26th, 2020: The leverage and legal risks
Rumours of restrictive legislation broke out on November 25th: the high leverage effect sent the Bitcoin down 13% in less than an hour.
A rumour broke out on November 25th that “the U.S. Treasury and Secretary Mnuchin are planning to rush out some new regulations regarding self-hosted crypto wallets before the end of the presidential term”. Market participants were on the lookout for any surprise legal action.
The end of 2020 was marked by severe legal actions by the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange commission (SEC). The calendar of legal actions started on October 1st with the CFTC charging the owners of the largest futures derivatives exchange, namely Bitmex, with “illegally operating a cryptocurrency derivatives trading platform and anti-money laundering violations”. The announcement was a tsunami in both the spot and the futures markets. If the first effect was negative (and quick), the second effect actually contributed to the price rally. Indeed, the legal action accelerated cryptocurrency withdrawals from exchanges, limiting drastically the available supply.
More recently, the Securities and Exchange commission “charged Ripple and Two executives with conducting $1.3bio unregistered securities offering”, driving the XRP/USD price down by 65% since December 18th.
As a consequence of the 13% correction at the end of November, liquidations of long future positions were reportedly close to $2bio. Bybt reported that 72% of long positions were liquidated within 24 hours, across major exchanges. The liquidations largely aggravated the size of the drop.
Last but not least, the STABLEAct was prepared by the U.S. administration in accordance with the Fed and IMF’s concerns over the rise of “shadow banking systems”, adding further uncertainty to the markets.
The rumour is not the only factor that explains the November 26th event, although it is a critical one. It reflects the overall sentiment towards regulation, especially with regards to DeFi, including decentralised derivatives and stablecoins.
10 - December, 2020: New BTC price records
The last month of the year is the highlight of 2020 for cryptocurrencies. Despite the Ripple rout and the restrictive regulatory stance assumed by most public institutions, the Bitcoin price finally broke the $20,000 level in the context of a historical rally.
The Bitcoin price was multiplied by 4 this year, and the rally is not slowing down. Investors are shifting their holdings from alternative cryptocurrencies into the number one cryptocurrency. Buyers find very little resistance on the upside.
The latest wave of High Net Worth Individuals (HNWI) and companies is investing for fear of missing out (FOMO), or for greed. There are signs of excess that could question the rationale of a Bitcoin investment at current levels. One of them is the 369% premium of the Bitwise Bitcoin fund at launch.
However, other fundamental indicators support the continuous growth of the crypto market in 2021. The launch of Ether futures by the Chicago Mercantile Exchange (CME), the rollout of Paypal’s service to all its customers worldwide, or the increased involvement of VISA and Mastercard for the mass adoption of cryptocurrencies.
As for Wirex, the hedgehog fintech was at the forefront of every development, every opportunity to bridge the gap between the crypto economy and Main Street this year. What a year indeed!