Written by: Yves, Head of Trading at Wirex
The Bitcoin price is still evolving near the $33,000 level, still looking for a clear direction as volumes keep on fading out. The total Bitcoin traded volume of major exchanges fell on Monday to a level that was last seen in December 2020 according to Blockchain.com. Most metrics that measure the cryptocurrency market activity reached their 2021 low this week. The Bitcoin on-chain average transaction fee dropped at $4.17. The Bitcoin mining difficulty has also collapsed, recording the largest daily drop (-28%) on record: this would certainly please the most passionate environmental critics of the first cryptocurrency as it should take significantly less computing power to mine a block, but it could also, to some extent, slow down the network: the average Bitcoin block time peaked at 24.82 minutes two weeks ago. It is still above its long-term average of 10 minutes, but quickly normalizing now.
The reason behind the difficulty’s collapse is China’s crackdown on the sector: Chinese miners have been packing after the recent cryptocurrency restrictions. China is shutting down its cryptocurrency activity, banning institutions from dealing in the sector and warning about the risks involved trading them. The government is looking to enforce capital controls in a country where Chinese individuals are not allowed to invest more than $50,000/year in offshore securities. It is certainly more difficult to control the cryptocurrency inflows and outflows than it is to control the Yuan. Meanwhile, the national rollout of the digital Yuan is accelerating. The digital Yuan trials already involve more than 10 million users. It’s been distributed across China via ‘red packs’ containing a few hundred Yuans. The currency is now being tested on the Beijing subway system for ride payments:
China has been actively promoting its digital CBDC, and dismissing the competition. It has specifically warned users about stablecoins, insisting that they are also a vector for illicit and money laundering activities. According to Ledger Insights, Fan Yife, Deputy Governor of the People’s Bank of China, told reporters that ‘measures have already been taken’.
The Bitcoin network difficulty’s historical drop: difficulty
If the difficulty’s drop is weighing on the market’s volumes, it is also favoring the remaining miners as their revenues and profits increased by roughly 10 to 15% since Friday last week.
On the derivatives side, BTC funding rates turned positive on Monday, after 18 consecutive negative days, and it is now back in negative territory. Shorts closed their positions as the market was aiming higher over the week-end (+4.3%), but the movement was too weak to spark a rally: some exchanges recorded on July 4th their lowest BTC/USD volume since October last year. And Binance’s BTC/USDT volume on Sunday was the lowest since May.
Binance in particular is still targeted directly or indirectly by regulators. The exchange is struggling to keep its functionalities alive. This week, it had to stop Euro SEPA transfers. This measure followed the recent FCA warnings on cryptocurrency investments, triggering tighter internal bank policies in the U.K: Barclays notified its customers four days ago that it is stopping payments made by ‘credit/debit card to [Binance]’. Natwest capped daily amounts sent to cryptocurrency exchanges. Santander also followed in Barclays’ steps yesterday. However, if the U.K were to ban cryptocurrencies like China did, the sector would always find a way to favor cryptocurrency adoption: while U.K. banks are considering restrictions, Crypto.com announced that it is the first platform to receive an Electronic Money Institution license (EMI) in Malta.
The tightening regulatory environment sent the BTC/USD market back near $33,000, and Ether (ETH/USD) back to the $2,000 level. The number of Ethers staked on the Beacon chain is now getting close to 6 million, jumping by ETH 93,216 on Tuesday alone. Nearly 5% of the Ether’s total supply is now staked for participation in the anticipated ETH2.0 Proof of Stake protocol. Regardless of the positive fundamentals, the second cryptocurrency lost 7,6% against BTC since Wednesday’s close.
On the DeFi side, both the Compound (COMP) and Aave (AAVE) protocol tokens outperformed their peers in the DeFI sector this month as they recently announced new ambitious developments targeting businesses and institutions. Compound launched Treasury, a service that lets institutions easily earn a 4% APR on US dollars. Their investment is converted into stablecoins to earn the high interest rates offered by stablecoins-only liquidity pools. Aave announced on Sunday the launch of Aave pro, a service for compliant and approved institutions (‘KYCd by Fireblocks’), expected this month. It also started its Credit Delegation service two days ago: the service would unlock uncollateralized lending contracts for trusted parties and institutions. The contracts are Open Law contracts that are legally enforceable.
The DeFI sector is accelerating its integration with traditional finance, offering rates that are much higher. These rates also reflect the inefficiencies of an ecosystem that is growing fast, much faster than its liquidity considering the neverending number of tokens and markets that are created every day. These inefficiencies generate large opportunities, but they could also hold high, unforeseen risks that the most greedy are the first to incurr.