Join Delphi Research today and immediately get access to our full Member Portal!
Join Delphi Research today and immediately get access to our full Member Portal!

Revenge Shorts, Crypto Indices, and a Trip to Goblin Town

Jul 22, 2021 · 5 min read

By Ashwath Balakrishnan, and Jeremy Ong

Market Update

Today’s been a sleepy day for BTC, with today’s candle barely visible. NFT project tokens have continued to increase in price, riding on the coattails of AXS’s fierce bounce.

Aggressive Shorting on AXS and SLP

  • The entire market was down in the dumps last week, but this week is looking a little stronger. AXS capitalized on its recent bout of strength and closed yesterday up 49% from its daily open (yes, 49% in one day).
  • Shorts are stacking up on AXS perpetual contracts, with funding now at -0.27% over the last 8 hours, or -295% per year (shorts pay longs). FTX listed a perpetual for SLP, Axie’s utility token, so now the Axie utility token and governance token compete for which one can hit the lowest funding rate. At one point, SLP was so heavily shorted that funding rates went to nearly -1.2% over 8 hours, or -1,315% per year (shorts pay longs).
  • Naturally, SLP closed yesterday’s daily candle with a modest 18% rise, forcing shorts to cover, and sending funding rates back to a reasonable level.
  • The short-side thesis for AXS is that it has run up far too quickly during poor market conditions, so it will eventually fall with the same ferocity. The long-side thesis is that Axie’s revenue is growing at a blistering pace, and that revenue will be soon be distributed to AXS stakers once staking goes live in Q3/Q4.

Crypto Indices vs HODLing Majors

  • When indexed from the Dec. 2018 lows, the Bitwise 10 index has underperformed BTC. Indices aren’t meant to outperform individual assets, they’re meant to be lower-risk portfolios compared to holding an individual asset. Unfortunately, this is crypto, so high correlations to BTC and large drawdowns are just a part of the game.
  • Comparing each portfolio’s (standalone BTC and Bitwise 10) macro top a few months ago to its recent bottom: BTC’s max drawdown was 53% and Bitwise’s was 50%. So while the Bitwise index did its job in terms of giving investors less downside, it was by a trivial amount. And individual BTC HODLers still have better dollar returns compared to the Bitwise index.
  • In fact, one could argue that the Bitwise index actually has a higher tail risk, including assets like BCH and XLM that have fallen out of favor and some like ADA that has performed well but are still unproven. Even if you don’t agree with that notion, investors could’ve just HODL-ed BTC for a slightly better return profile.
  • Crypto indices continue to be a work-in-progress. Choosing assets, allocations, and re-balancing thresholds is a difficult task for an emerging asset class like crypto. But as the industry matures, we expect more efficient indices to pop up and gain traction.

  • Drawing from another example, albeit imperfect, holding ETH massively outperformed the DPI (DeFi index) since the index’s inception. In fact, ETH also had a lower maximum drawdown of 57% vs the DPI’s 65%. This is an imperfect comparison because the risk and volatility of DeFi tokens are higher than ETH’s. The time frame also works against the DPI since it launched at the end of DeFi summer.
  • But some consider ETH to be an index for DeFi, given the DPI’s constituents — and most of DeFi — are built on Ethereum. But either way, the core premise holds: you could’ve just HODL-ed ETH for a superior risk-return profile.

Welcome to Goblin Town?

  • Some people think BTC is still in a bull market, some think it’s entered a bearish cycle. But Bitcoin’s usage data is most certainly in a bear market. Transactions per day and active addresses on the network are both down over 50% from their 2021 high and approaching their 2018 lows.
  • The bright side of this is, if on-chain trends are a reliable indication, we’re either already at or close to the capitulation event that pushes BTC higher.

Notable Tweets

Delphi is turning 3 soon!! What a ride it has been.

Ashton Kutcher hosts an interesting guest.

A thread on Bitcoin’s on-chain supply distribution.

The difference between Polkadot and Kusama.

Join Delphi Research today and immediately get access to our full Member Portal!

Join Now  or  Sign in