Written by: Yves, Head of Trading at Wirex
The cryptocurrency market resumed its bearish trend this week. The Bitcoin price reached $42,333 on Coinbase six days ago, and $41,634 on Bitfinex. These are the lowest levels observed since October 1st. Once more, the high futures open interest weighted on the amplitude of the drop. The BTC/USD pair lost more than 20% and 1.3 billion dollars’ worth of long future contracts were liquidated in the span of four hours on December 4th. More than two billion dollars’ worth of long future contracts were liquidated on this day according to Coinglass. Although the price of the main cryptocurrency rebounded since, quoting at $48,270 at the time of writing, the market has yet to recover from the shock. Its severity is comparable to the May 19th drop that followed Tesla’s suspension of its Bitcoin payment plan for its vehicles.
The aggregated open interest of Bitcoin futures dropped from $23 billion to $17 billion this week. It is now circling near October’s levels. We are back to a more healthy level of leverage in the market. Implied future rates dropped below 8% on the January expiration date on the institution-friendly Deribit exchange. And the BTC annualised daily basis collapsed on the retail-friendly Binance exchange. The shock wave wiped out the short-term positions of both institutional and retail investors.
The selling pressure triggered a flash crash on Huobi’s BTC/USDC and ETH/USDC pairs. The pairs printed $28,801 and $3,046 respectively on December 4th. These levels are respectively 30% and 12% below the lows observed on major markets. Although the daily volume of this pair on Huobi is twice as high as the same pair’s on OKEx, it is either unreasonably used by automated liquidators to dump their collateral, and/or displaying an unreliable market depth. The exchange’s volumes suffered this year from the Chinese crackdown and it withdrew from Singapore two months ago for regulatory reasons.
The Bitcoin dominance fell this week to its lowest since May, holding for now above the 40% mark. All major cryptocurrencies are in the red except for Terra’s Luna token. Luna stakers in this stablecoin protocol are expected to enjoy higher swap fees (stablecoins for Luna) and seigniorage fees during market unrest. For seigniorage fees in particular: as the stablecoin moves above parity (1 TerraUSD > 1$) with increased TerraUSD demand, more TerraUSDs would be minted by the protocol, and swapped for Lunas. The Lunas received are burned, decreasing the Luna supply, and bumping the share of total Luna supply held by the stakers. In time, Luna has the potential to be a good hedge against market volatility. But for the time being, it is mostly experiencing the exponential dynamic of promising early-stage projects.