BTC on Ethereum Won't Slow Down, Mixed Signals from Spot and Derivatives Market

JUN 08, 2021 • 4 Min Read

Ashwath Balakrishnan + 1 other

Disclosure: Members of our team may own positions in assets mentioned in this report. This statement is intended to disclose any conflict of interest and should not be misconstrued as a recommendation to purchase any token. This content is for informational purposes only and you should not make decisions based solely on it. This is not investment advice.

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Market Update

The crypto market had a weak open during Asia hours and the futures premium on BTC has eroded. Given the amount of forced selling and leverage wipeouts that occurred in the past few weeks, the fact that BTC is still holding $30,000 implies there’s a strong spot bid. However, conditions can reverse in an instant in crypto markets, and sellers have continued to offload coins with a vengeance.

1% of Total Supply of BTC is in DeFi

  • 1% of all BTC that can ever exist is currently locked on the Ethereum blockchain. WBTC continues to lead the way and expand its market share with 79% of all BTC on Ethereum.
  • BTC is a proven store-of-value and the most resilient crypto asset. Its use as collateral in DeFi has skyrocketed in the past 1.5 years and is expected to continue growing as DeFi gathers more traction.

Largest Daily Outflow of BTC

  • Yesterday marked the largest daily outflow of BTC from exchanges year-to-date, with nearly 22,500 BTC leaving various exchange wallets. In this case, Kraken is the main culprit for the BTC outflows, accounting for 18,019 of the negative net flows.
  • Historically, large exchange outflows have been a sign of long-term accumulation. However, given various dynamics at play, it’s important to be aware of BTC’s growth in DeFi, as these coins leaving the exchange could be used as collateral in DeFi.

BTC Futures Backwardation

  • Futures basis on Deribit and CME have slipped into backwardation after a week of ranging near 0%. Backwardation is considered normal but potentially indicates that market participants expect lower prices in the future. On the flipside, backwardation also occurs when demand for spot is much higher than futures.
  • Given recent price action, it’s prudent to assume most traders aren’t looking to lever up hard again — at least not yet. In hindsight, the wide basis spread (between 30-60%) earlier this year was a sign of excessive leverage.
  • Term Check: Backwardation refers to a condition where spot price is higher than futures. Contango is a situation where futures prices are higher than spot prices.

Aave, Maker Loans Recover From Lows

  • Loans outstanding in DeFi protocols is recovering despite muted market conditions, with Aave surpassing it’s previous ATH and Maker closing in on fresh highs. Compound, however, has been a laggard with a sharp decrease in TVL and is yet to recover. A large amount of capital in Compound was likely mercenary capital farming COMP, which would explain the lack of bounce in outstanding loans so far.
  • Leverage in DeFi excludes high-risk derivatives positions, which possibly explains the stickiness of borrowers. As low risk stablecoin farmers look to deposit for yield in Aave, and higher-risk farmers borrow from Aave to farm on Curve and elsewhere, DeFi money markets are proving to be resilient.

Notable Tweets

Interesting thread speculating Elon Musk’s long term plans for BTC.


The Federal Government seized $2.3m worth of BTCs from the Colonial Pipeline ransomware attack with private key access.

Options flow continues to be mildly bearish with very little volume.

 

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Ashwath Balakrishnan + 1 other