Metaverse Movers, Axie Econ, & Post-Euphoria Market Structure

NOV 01, 2021 • 4 Min Read

Ashwath Balakrishnan

Disclosure: Delphi Ventures is invested in BTC, ETH, AXS, and YGG. Members of our team also hold SLP and SAND. These statements are 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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Healthy Market Structure

  • Compared to last week’s extravaganza, funding rates have fallen in the last few days. But market sentiment is still very much a bull-dominated one. The above chart is the average funding rate per day to be paid every 8 hours (multiply by 3 for daily average funding). While funding has drifted negative for small periods, the average funding a trader has been paying has still been positive.
  • It’s difficult to say “funding has reset” in conditions where negative funding rates are immediately met by an influx of longs. Given current sentiment, it’s not surprising that the bulls are slurping up every dip they find. However, this implies a higher degree of long leverage, and so yet another “long squeeze” can’t be ruled out.

  • BTC’s latest rallies in late Q3 and early Q4 have not been met with much action in implied volatility, according to the DVOL index, which measures the approximate implied volatility for a market over the next 30 days. When implied volatility is high, one can say the market is pricing in a lot more price uncertainty, whereas when implied volatility is low, it indicates less uncertainty; implied volatility tends to spike during market sell-offs and trend lower when BTC steadily trends higher.
  • We haven’t seen an extreme swing upwards on implied volatility, which tells us that the general market is comfortable with what BTC is doing. However, if BTC rallies back above $67k and implied volatility starts to surge, it could be an indication that another short-term pullback is imminent.
Enter the Simulation

  • Metaverse tokens got a boost from Facebook’s announcement that it’s rebranding to “Meta.” MANA, Decentraland’s token, has been one of the biggest beneficiaries, evident in its 200% price surge since the announcement. The Sandbox — a virtual world where players can build, own, and monetize their gaming experiences in the Ethereum blockchain — was the second biggest winner, with its token price more than doubling over the same short time period.
  • While a lot of this is the work of crypto’s trademark “hot ball of money,” seeing the traditional tech world embrace concepts like metaverse-like experiences naturally gives the entire industry a bit of a boost, allowing investors to get more comfortable allocating capital to similar types of projects.
Axie’s Economic Overhang

  • Axie Infinity is the largest crypto-native game, but there are a few important factors that feed into the economics of its in-game utility token, Smooth Love Potion (SLP). Since the game started to take off, a booming scholarship ecosystem has formed around the game to provide underprivileged users with the resources to play the game and breed Axies. These scholarships have largely had a positive impact on the lives of those in developing nations, giving them alternative means to generate income.
  • In order to play the game, you need 3 Axies. When you win a game, you earn SLP, which serves as the primary income stream for many players. But in order to monetize their gameplay, they must sell SLP for fiat, which effectively increases net SLP emissions. This supply increase can be offset by stronger demand for breeding as breeding requires players to burn SLP. However, demand for breeding has weakened, in part because the floor price on Axies has slid. In other words, breeding is not as profitable as it was a few months ago, hence one reason why net SLP emissions are on the rise.
  • AXS is also required to breed Axies, and its price has increased over 20x over just the last four months alone. Breeding costs were reduced from 2 AXS to 1 AXS in September, but that hasn’t been enough to incite enough demand to breed to offset recent SLP emissions.
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