Crypto market performance
Over the past month, we have seen volatility pick up across markets on the back of central bank policies, as well as rising political disruption from Russia’s military invasion of Ukraine.
Previous gains from the end of February were short-lived as BTC found its support back around the $40,000 level and ETH at $2,600 levels at the start of this month. LUNA was the best performing large-cap coin, up 18.64% in the first week of March. This comes after Luna Foundation Guard’s (LFG) announcement of their $1 billion capital raise through a private token sale. This is one of the largest token raises in history. DOT and XRP also saw positive returns, up 7.89% and 4.36%, at writing.
March is off to a solid start with positive returns across all sectors. DeFi leads the pack with a 14% return, followed by Top Assets (large caps) up 12.6%, and L1s (smart contract platforms) up 11.7% this month.
Uncertainty is at the top of investors’ minds as the market sees a pick up in macroeconomic headwinds, accelerated by Russia’s invasion of Ukraine. March is likely to continue driving a risk-off narrative along with developments from the latest Fed meeting and CPI data. Many investors are finding refuge in commodities and metals.
Growth stocks saw the largest sell-off since the start of the conflict, losing up to 4% in the last two weeks. Stocks in the SP500 and Dow Jones have turned slightly negative. Oil prices jumped to their highest levels since 2008 earlier in the month, as the United States and EU considered banning Russian oil imports. BTC and ETH have seen the highest volatility this month, trading at 83% and 89% realized volatility; however, it’s important to note that this is still below their 2021 ATH.
Market Structure: ATH buyer capitulation vs. HODLer dry powder
We have seen a largely sideways market with high intraday movements: BTC ranging between 38,000 and 41,000 (higher lows) and ETH trading between 2,500 to 2,700.
Despite macro instability, the BTC balances on exchanges have stabilized since September 2021, indicating that the selling supply has not increased. Price action is likely to be driven by leverage positioning in the perps and options market rather than spot.
Revived Supply is another interesting on-chain metric that looks into the volume of BTC older than one year spent on a per week basis. This metric provides a view on the long-term HODLing behavior. As illustrated below, HODLers are holding steady with no spikes in activity relative to price action since August 2021. Most bear market bottoms have seen HODLers aggressively sell BTC. If we see a meaningful change in HODLer behavior toward the downside, this could strongly indicate negative market sentiment or the beginning of a bear market.
Turning to the derivatives market, we see a strong bias for short positions, as funding rates continue to be negative on the major exchanges, including Binance, FTX and dYdX. The high demand for short positioning indicates expectations for a bear market. Average funding rates are touching -0.008%, which is still far from the levels we saw before the September 2021 bull run, which saw rates at -0.01% – a clear overleveraging of short positions in the market.
Regarding L1 market structure, there’s been a slight negative impact on total value locked (TVL) from most of the major blockchains compared to last month: ETH decreased by $6 billion and Binance Smart Chain (BSC) by $2 billion. AVAX was largely neutral. Terra was the only chain that experienced substantial growth, increasing $10 billion in TVL over the last 30 days.
Theme of the month: Stablecoins
As the crypto market continues its meteoric growth and sees more mainstream adoption, the area that goes unrecognized by investors is the $188 Billion stablecoin market. Stablecoins currently represent about 17.5% of the total market capitalization of crypto (considering $1 Trillion total market capitalization). They are the preferred token for many new crypto users onboarding to the space.
The first stablecoin created in 2014 was known as BitUSD, issued by BitShares. BitUSD was collateralized by different cryptocurrencies and the platform’s native BTS token. However, in 2018, it lost its peg to USD and currently trades at $0.80. Since then, many stablecoins with different characteristics have been issued, most notably: USDT (USD Tether) issued by Bitfinex in 2014, currently with an $80 Billion market cap and USDC
(USD Circle) issued in 2018 by the Centre Consortium – including Circle and Coinbase – currently with a $50 Billion in market cap.
So what are stablecoins?
Stablecoins are cryptocurrencies meant to represent fiat currency on the blockchain, meaning that their value is supposed to be redeemable 1:1 for the value of their fiat counterpart. Most stablecoins are USD-pegged stablecoins, although recently, we have seen the issuance of a Euro stablecoin and a Singaporean Dollar stablecoin (XSGD).
Types of stablecoins
We can classify stablecoins based on how these stablecoins replicate or represent their fiat counterparts, meaning the underlying collateral or the algorithmic supply/demand that backs their value.
The main categories are:
- Fiat backed (off-chain): USDT, USDC, BUSD, GUSD
As the name indicates, fiat-backed stablecoins are cryptocurrencies backed 1:1 by their fiat counterpart off-chain, either by US Dollars or a cash equivalent such as high-quality liquid paper.
- Crypto backed (on-chain): DAI, flexUSD
The type of collateral backing stablecoins differs across stable tokens. In the case of DAI, it is overcollateralized by different “blue-chip” cryptocurrencies such as BTC or ETH. In the case of flexUSD, this is backed by USDC and CoinFLEX’s repo assets.
- Algorithmic: TerraUSD, SILK, FRAX
Algo stablecoins do not use fiat or cryptocurrency as collateral. Rather, the price stability is dependent on the use of specialized algorithms and smart contracts which manage and dictate the supply/demand economics. The logic is that when the price of the coin falls below a specific threshold, the supply of coins would automatically decrease, which increases the coin’s value. Likewise, when the coin price surpasses a particular threshold, the supply would increase with new coins entering into circulation, pushing the coin’s value down.
- Commodity backed: PAXG, and GOLD ( Tether Gold)
Commodity backed stablecoins are pegged to the price of a commodity. In the case of PAXG, every coin is backed by one fine troy ounce (t oz) of a 400 oz London Good Delivery gold bar that is stored in Brink’s vaults.
Use cases and risks
The main use case of stablecoins is to be a medium of exchange, as it works as a bridge from fiat into the blockchain reducing the gap between both. Furthermore, they provide price stability and reduction of volatility for crypto owners looking for refuge in bear markets. The use of stablecoins has opened the frontiers of Decentralized Finance (DeFi) as it has allowed easier borrow/lending, yield creation, and money transfers on-chain, in a more efficient and cheap way than traditional capital markets.
There are also inherent risks associated with stablecoins: counterparty risk, credit risk, liquidity risk and settlement risk among others. It’s important to assess these risks prior to investing.
Stablecoins have emerged as the backbone of crypto, not only by serving as a bridge between the fiat and blockchain worlds, but also as a volatility buffer for players in capital markets and an enabler of DeFi platforms. We expect to see stablecoins growing hand in hand with the industry, with the creation of new forms of stablecoins. In any case, it is important to understand the risks associated with any existing and newly-issued stablecoins as well as their liquidity and cross-chain capabilities.
Author: Steph FB