Crypto Volatility: The Empire Strikes Back
Executive Summary
- Market trading color: Recent market action spiked volatility, futures open interest fell, and ETFs saw massive trading volumes
- Theme of the week – A postmortem of the week and the importance of onchain metrics
- Sector commentary: Bitcoin whales increase holdings during market turmoil; institutions maintain adoption despite volatility
Market Trading Color (Nolan Aibel)
Source: DigOpp
Volatility has been heightened as result of the recent market action. Monday saw nearly $4B worth of BTC and ETH options traded, a 200% increase in volume vs daily averages. Implied vol peaked around 74 for ETH and 60 for BTC Tuesday. Term structure on both majors is elevated on shorter dated options.
Source: lookonchain
Futures open interest fell significantly as liquidations cascaded the market. Bitcoin OI sits at $27.3B, down from last weeks highs of $37.5B. CME sits firmly planted as the number one exchange for BTC futures expression with $7.85B in OI. Similar to BTC, ETH OI still remains elevated on a 1 year lookback at $10.2B but is down significantly from May highs which peaked above $16.8B. Only $808M of this exists on CME. SOL on the other hand has seen open interest skyrocket, up over 16% on Tuesday climbing above $2.1B.
ETFs have seen massive trading volume over the course of the week. Monday alone saw $5.3B in volume between BTC and ETH ETFs. While we’ve only seen net outflows this week from BTC products, these were light compared to what was expected given the geopolitical and macro factors. ETH ETFs have seemed to turn a corner as $ETHE outflows have decreased on a daily basis since the first day of trading. These ETH ETFs took in their highest total inflows on Tuesday, since the first day of trading, with $98.4M.
Factors for Monday's Market
Monday's major market decline can be attributed to multiple factors, including economic concerns, Federal Reserve actions, currency trades, and corporate earnings. Below are the key points summarized:
- Economic Concerns:
- Disappointing manufacturing and layoff data.
- Lower-than-expected job creation and a rising unemployment rate, triggering recession fears.
- Traders now expect the Fed to aggressively cut rates, anticipating 1.25 percentage points reduction by year's end.
- Federal Reserve:
- Sentiment that the Fed is slow to ease rates, which are at 23-year highs.
- Market pricing suggests significant rate cuts are expected in upcoming meetings.
- Currency Trades:
- Unwinding of the "carry trade" (borrowing in cheap currencies like the yen to buy higher-yielding ones) due to unexpected rate hike and currency intervention by the Bank of Japan.
- The yen's rally and a significant drop in Japanese stocks contributed to market turmoil.
- Corporate Earnings:
- Mixed earnings reports with a high percentage of companies beating profit but not revenue forecasts.
- High-profile companies like Nvidia have seen significant stock price declines.
- Geopolitical Concerns:
- Ongoing issues in the Middle East and Ukraine.
- Political uncertainty in the U.S., with polls showing a tight race between Kamala Harris and Donald Trump.
Given the current market environment, clients with exposure via ETFs should consider adding spot trading capabilities to help improve risk management. Trading spot assets provides 24/7 connectivity, allowing investors to respond to market changes in real-time, unlike ETFs which are limited to market hours. Additionally, spot trading offers the ability to utilize on-chain metrics, providing deeper insights into market behavior and asset performance, as demonstrated in the examples below.
Whale Wallet Activity
Since mid-July, wallets holding over 1,000 BTC have grown by 1.5%. On August 7, CryptoQuant founder and CEO Ki Young Ju highlighted significant behind-the-scenes activity, noting that approximately $22.8 billion worth of Bitcoin (404,448 BTC) has moved to permanent holder addresses in the past 30 days, signaling clear accumulation. Retail investors remain largely absent, reminiscent of mid-2020, with reduced activity from long-term whales.
Source: Cryptoquant
JP Morgan reported that retail investors were panic-selling $1 billion worth of assets while institutions made substantial net purchases of $14 billion, well above the 12-month average. This included $472 million in ETF inflows, contrasting with $1.4 billion in outflows from individual stocks.
Adding to this market dynamic, a graph showing Bitcoin realized profit and loss indicates a significant spike in losses, with $570 million in realized losses on August 6th, equivalent to about 10,000 Bitcoin. Despite this, approximately 49% of short-term Bitcoin holders still have unrealized profits, while 94% of long-term holders remain in profit.
Source: checkonchain
On August 5th, Bitcoin experienced significant market volatility, leading to $179 million in long liquidations as the price dropped sharply. This was followed by an additional $54 million in liquidations on August 6th. Our previous color this week emphasized gas fees on Ethereum spiking as traders went to quickly cover their positions in DeFi pools.
Source: checkonchain
Over the past week, on-chain activity has revealed Jump Trading depositing significant amounts of ETH to Binance, signaling their intent to sell. This screenshot below shows the importance of monitoring on-chain transactions.
Source: lookonchain
Jump Trading’s Volume
Jump Trading's crypto division, Jump Crypto, has maintained flat WBTC holdings but has significantly shifted its digital asset portfolio away from Ethereum. Since July 24, the firm has sold over $377 million worth of Wrapped Lido Staked ETH (wstETH) and plans to sell a total of $481 million. Most of this activity occurred after a CFTC investigation became public, contributing to the market correction.
Jump Crypto has transferred $449.52 million in ETH to exchanges since July 5, with net negative flows of $344.92 million. As selling pressure from Jump Trading nears its end, with only $63 million worth of wstETH left to sell, the market might be approaching a bottom.
Source: Arkham Intelligence, Blockworks
The chart above shows the price of ETH over the past month. Green plus symbols show hours in which net ETH flows into Jump Crypto’s wallets were positive. Purple diamonds are for hours where net flows were negative. The aggressive selling by Jump Trading and other major market makers like Wintermute and Flow Traders has driven Ether to a five-month low below $2,200. Despite this, Ether saw a slight relief rally, trading at $2,533 as of August 7th.
Bitcoin’s Severe Correction
Bitcoin is currently undergoing one of its most severe corrections in the past decade. From August 1st through the 6th, Bitcoin's negative returns have surpassed 90% of the drops it experienced in similar time frames over the last ten years. At its lowest point, this correction was even more severe than 95% of the six-day corrections seen in the past decade, marking an exceptionally challenging period for the cryptocurrency according to Ecoinmetrics.
Source: Ecoinmetrics
The Fear and Greed Index plummeted to 16 on Monday, signaling extreme fear, a sharp decline from last week's reading of 67, which indicated greed and now rests at 29 (fear). The index is a compositive of factors that includes volatility, market momentum, social media, surveys, and Bitcoin dominance and is often a good gauge on how many are feeling.
Something Positive
Amid the turbulence rocking the markets, there are some silver linings. Key dates for FTX customers mark potential positive shifts with the voting deadline for FTX customers is on August 16, followed by Judge Dorsey's decision on plan approval on October 7. Should the plan receive approval, FTX intends to reimburse creditors within two months. As the majority of FTX users are interested in crypto, they are likely to reinvest their funds, potentially leading to substantial buying pressure in the crypto market. This influx of capital could act as a catalyst for Bitcoin and other cryptocurrencies.
Sector Commentary
- Layer One / Altcoins
- Bitcoin ($BTC): Saylor says BTC strategic reserve is ‘Louisiana Purchase’ moment for US (link)
- Bitcoin ($BTC): Bitcoin Whales Increased Holdings During Crypto Market Mayhem, but ETF Investors Didn't Buy the Dip (link)
- Bitcoin ($BTC): Bitcoin Jumps Above $56K, Solana Leads Recovery From Monday's Rout (link)
- Bitcoin ($BTC): Bitcoin's Death Cross Is Looming Again (link)
- Bitcoin ($BTC): These Two Bitcoin Indicators Offer Light in a Gloomy Market (link)
- Ethereum ($ETH): ETH staking reaches 27.95% as liquid restaking protocols experience exponential growth (link)
- Ethereum ($ETH): Ethereum Layer 2 proliferation causing liquidity fragmentation concerns, analyst says (link)
- Ethereum ($ETH): Data points to Ethereum price making a short-term rally to the $3.2K level (link)
- Solana ($SOL): Crypto Bank Anchorage Adds Custody for Solana-Based Tokens (link)
- Altcoins: CoinDesk 20 Performance Update: RNDR Bounces 14.2%, Leading Index Higher (link)
- DeFi
- Web3 / AI / NFTs
- RWA / Tokenization / Metaverse / Gaming
- Digital Infrastructure: Capital Markets / Exchanges / DAOs / Mining
- Bitcoin Institutional Adoption 'Remains on Track' Despite Market Turbulence: Bernstein (link)
- The Block: ‘The only thing that's certain is volatility’ – Four leading market experts weigh in on the start of a volatile week (link)
- Semler Scientific Studied MicroStrategy’s Success Before Adopting Bitcoin Strategy (link)
- Japanese firm Metaplanet to invest $58.76M in Bitcoin (link)
- ARK Bought $17.8M of COIN, $11.2M of HOOD as Market Slumped (link)
- CoinShares revenue surges 110% in Q2, driven by FTX claim sale (link)
- iShares BTC ETF investors weather major price drop with zero flows (link)
- Ethereum ETFs Scored $49M Inflows as ETH Plunged (link)
- 2 reasons Solana and other altcoins ETFs may struggle — Sygnum Bank (link)
- World’s largest Bitcoin miner increased BTC holdings by $124M in July (link)
- Bitcoin Miner Core Scientific Shares Spike After Signing $2B of Additional Computing Contract (link)
- Bitcoin miner Hut 8 hires former Citigroup exec as new CFO (link)
- Crypto Industry Tries to Tally Final Wins As U.S. Congressional Primaries Wind Down (link)
- SEC Asks NY Court to Deny Coinbase’s ‘Breathtakingly Broad’ Subpoena Request (link)
