Original: “Three Fallen Banks” by Checkmate, Glassnode
Compilation: Dongxun, the way of DeFi
After one of the biggest weeks of 2023, the Crypto asset industry has lost three crypto-friendly banking institutions in the United States. So far, however, the main reaction from investors seems to be to seek safety in the least trusted major assets, BTC and ETH.
Last week has become the fastest-paced and most influential week in the field of Crypto assets this year. In just a few days, three major U.S. banking institutions, all of which provide services to companies in the crypto industry, have entered voluntary liquidation or been taken over by U.S. regulators.
Silvergate (SI) announced a voluntary liquidation in an orderly manner on March 8, returning funds in full to depositors.
Silicon Valley Bank (SVB), the 16th largest bank in the United States, was closed and placed into receivership by the Federal Deposit Insurance Corporation (FDIC) on March 12, making the $209 billion bank the second-largest bankrupt in U.S. history.
Signature Bank of New York (SBNY) was also closed on March 12, according to the Federal Reserve’s announcement on the matter.
For the three banking institutions, all deposits are expected to be returned through reserves held, or through deposit guarantees from the FDIC and US regulators. The weekend was volatile as many of the largest Crypto asset firms and stablecoin issuers use one or more of these banking partners. What deserves special attention is Circle, the issuer of USDC. He informed that he holds about 3.3 billion US dollars in cash in SVB, creating conditions for USDC to temporarily break the peg of 1 US dollar.
This article will focus on some key implications both on-chain and in the broader market structure, including:
Several stablecoins depegged from $1, and dominance shifted back to Tether (USDT).
Net capital outflows in the Crypto asset market can be observed in two stablecoins as well as the two major currencies of BTC and ETH.
Futures open interest hit cyclical lows despite higher trading volumes. Speculative interest led to an explosive rally in BTC to $22,000 and ETH back to $1,600.
Bitcoin price discovery trades between several popular and widely observed technical analysis pricing models. After meeting resistance at the 200-week and 365-day moving average (~25.0k) in February, the price touched around the 200-day and 111-day moving average (~$19.8k) this week before bouncing off.
Note that this is the first cycle in history where BTC traded below the 200-week moving average, and from this perspective, the market is in new territory.
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For the first time since the collapse of the LUNA-UST project, this week saw stablecoin price volatility amid fears that USDC would partially lose support. USDC fell to a low of $0.88, followed by DAI at $0.89, the latter as a result of DAI being roughly 65.7% backed by stablecoin collateral.
Additionally, Gemini’s GUSD and Paxos’ USDP are both slightly below their $1 peg, while BUSD and Tether are trading at a premium.
Tether, in particular, saw a premium of $1.01 to $1.03 for much of the weekend. Ironically, Tether is seen as a safe haven amid concerns about the broader fallout from the heavily regulated U.S. banking sector.
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In the case of DAI, stablecoins have become the primary form of collateral backing it, a trend that has been growing since mid-2020. USDC accounts for about 55.5% of direct collateral and has a large share of the various Uniswap liquidity positions used, totaling about 63% of all collateral.
The incident certainly opened up discussions about the long-term implications of DAI, which is said to be a decentralized stablecoin. However, this incident demonstrates how the price of DAI is closely related to the traditional banking system through the collateral combination (which also includes an additional 12.4% of tokenized real-world assets).
As we reported in mid-2022, Tether’s dominance in the stablecoin market has been structurally declining since mid-2020. However, with recent regulatory moves against BUSD, and concerns related to USDC this week, Tether’s dominance has climbed back above 57.8%.
USDC has dominated 30% to 33% since October 2022, but it remains to be seen whether the supply will dwindle as the redemption window reopens on Monday. BUSD has seen a sharp decline in recent months, issuer Paxos stopped new minting, and dominance dropped from 16.6% in November to 6.8% today.
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Total capital outflow
Estimating true capital inflows and outflows in Crypto asset markets can be tricky, but in most cases, the initial inflow of capital is through two major assets (BTC and ETH) or stablecoins. Therefore, the realized caps of BTC and ETH combined with the circulating supply of major stablecoins provide a fairly robust measure.
Here we can see that with this approach, the overall market is worth about $677 billion, down about 20% from the ATH of $851 billion set a year ago. The dominance of BTC is 56.4%, ETH is 24.5%, USDT, USDC and BUSD is 17.9%, and the remaining 1.2% is LTC.
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On a 30-day basis, February saw net inflows for the first time since April 2022, peaking at +$5.8 billion/month, led primarily by BTC and ETH. However, last month, the market saw a -$5.97 billion reverse outflow, 80% of which was the result of stablecoin redemptions (mostly BUSD) and 20% from realized losses in BTC and ETH.
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As investors sought refuge in BTC and ETH following news of the Silicon Valley bank’s collapse, every trading platform we monitored saw notable outflows. Roughly 0.144% of BTC and 0.325% of circulating ETH were withdrawn from exchange reserves, suggesting a similar pattern of self-custody reactions to the FTX crash.
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In U.S. dollar terms, more than $1.8 billion in total value of BTC and ETH flowed out of trading platforms last month. That’s not necessarily huge in relative terms, but it’s worth noting to observe that net withdrawals from trading platforms, especially in the current hostile regulatory environment, do illustrate the level of investor confidence.
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On the other hand, the two major stablecoins see net inflows to trading platforms of $1.8 billion to $2.3 billion per month. It’s important to note that this is more than offset by BUSD’s outflow from trading platforms at a staggering rate of -$6.8 billion per month. Therefore, it is likely that some degree of “stablecoin switching” is taking place.
Overall, however, this appears to be a market reaction to stablecoins, BTC and ETH, reflecting a notable appreciation for self-custody of trustless assets.
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flush futures
Finally, we will assess the reaction expressed through the futures market. Total open interest in the two major assets fell to cyclical multi-year lows this week. Bitcoin futures positions have a notional value of $7.75 billion, or about 63% of total open interest.
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For futures volume, Bitcoin’s dominance is similar at around 60%, and volume has picked up after the post-FTX and year-end lull. The total transaction volume is about 58.2 billion US dollars per day, which is equivalent to the level of the whole year of 2022.
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Part of the reason for this week’s price volatility is a series of bull and short squeezes. Around $85 million in BTC long positions were liquidated during the sell-off to $19,800. Short positions of around $19 million were subsequently liquidated as the price recovered above $22,000.
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Prior to this rally, funding rates in the perpetual swap market had entered extreme backwardation levels. Traders pay annualized funding rates of -27.1% and -48.9% to short BTC and ETH, respectively. Traders were also much more short ETH, with the BTC:ETH spread hitting 21.8%, the widest level since the FTX sell-off.
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This exacerbated liquidation in the ETH futures market. More than $48 million of shorts were liquidated when the market rallied back above $1,600, meaning liquidations were 2.5 times more notional relative to BTC.
This suggests that the ETH market has been used more recently to express speculative interest, exacerbating volatility.
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We’ll end with a final chart that overlays the on-chain reaction of short-term holders (STHs) with that of the leveraged futures market. This chart shows STH-SOPR minus 1, plotted against the annualized futures funding rate, and the results are as follows:
With our defined age threshold of 155 days, almost all STH coins are likely to be profitable, except for those acquired near local highs.
Based on our defined age threshold of 155 days, almost all STH coins are likely to be profitable, except for those tokens obtained near local highs. STH-SOPR (minus 1) returned -3.8%, a relatively large realized loss, suggesting that local “top buyers” now dominate spending. The direction and performance of the STH-SOPR tends to correlate with the funding rate. These two metrics reflect a different but significant subset of the BTC market, with one representing spot/on-chain and the other representing leveraged futures.
With that in context, it appears that most of the tokens spent this week were realized losses by top local buyers (other holders were relatively dormant). This happened before futures entered sharp backwardation, with traders opening speculative short positions.
Following news of bank deposits being secured, a strong rally pushed BTC above $22,000 and ETH above $1,600, catching much of the market off guard.
in conclusion
After one of the most impactful weeks of 2023, the Crypto asset industry is missing three crypto-friendly banking institutions in the U.S. and finds itself in an increasingly hostile regulatory environment. With traditional financial markets closed for the weekend, some stablecoins have seen deviations from the $1 peg, recovering with news of guaranteed deposits on Sunday.
The reaction of investors is somewhat similar to the post-FTX environment, with a net transfer of stablecoins to trading platforms instead of hosting BTC and ETH. On a broader scale, however, the industry experienced net capital outflows of around $5.9 billion in the last month.
The industry, and indeed the global financial system, remain in uncharted waters. In many ways, this week reinforced Satoshi Nakamoto’s reasons for creating a trustless, scarce Crypto asset in the first place.