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Hello and welcome to the FT Cryptofinance newsletter
The cryptocurrency market is used to volatility, but even by those standards this week has been a rollercoaster ride.
Prices of Bitcoin, Ethereum and Solana suffered their sharpest declines since the market crisis in the summer of 2022. Unlike two years ago, this wasn't a turmoil caused by the industry itself, but was part of a broader market turmoil in which concerns about tech earnings and a potential U.S. recession, as well as the unwinding of leveraged trades, caused big moves in global stocks, bonds and currencies.
Here are some takeaways from this week's activities:
1. The market was too hot for some
July was a good month for cryptocurrencies. Long-suffering creditors of Mt. Gox and Genesis received good news that they would receive their long-awaited payments, and bullish talk swirled about a crypto “Trump trade” based on the idea that President Donald Trump would bring about a more favorable environment for digital assets.
The upbeat mood was underscored by interest in bitcoin perpetual futures topping $11 billion, approaching an all-time high, which analysts at data firm Kaico said suggested “fresh capital is entering the market.”
Bitcoin's funding rate, an indicator of the direction of traders' overall positions, remains positive, suggesting the market is expecting further gains. Bitcoin hit a near all-time high of $70,000 after President Trump's speech at the Bitcoin Conference two weeks ago.
But beneath the surface, the composition of the rally was shifting: While retail investors remained enthusiastic, momentum traders such as commodity trading advisors had begun unwinding long positions and increasing short positions in the weeks prior, a sign of trouble to come, according to JPMorgan.
2. Trading in the cryptocurrency market remains very simple, for better or worse.
When the economy tanked, people scrambled for cover. Typically, traders go to where there is liquidity to sell as quickly as possible. That was the case here. According to CC Data, spot trading volume on centralized exchanges was the second highest since May 2021, when China banned Bitcoin mining.
A common feature of leveraged trading is the level of liquidation, where crypto exchanges automatically start selling part of clients' bets if the margin they provide isn't enough to cover losses on a trade. Just over $1 billion was liquidated in 24 hours, the highest since early March, according to data from CoinGlass.
But here's the thing: Once liquidations dried up, sentiment turned and people started buying. Crypto broker FalconX said that “almost all” of its clients, including prop desks, hedge funds, venture funds and retail aggregators, rushed to buy at the lows. Binance saw net inflows of $1.2 billion that day after the selloff subsided as clients moved funds into its own accounts.
Bitcoin and other cryptocurrency markets lack volatility-busting products such as short futures exchange-traded funds and risk parity that are common in the stock market. Automatic liquidations are controversial because they tend to exacerbate declines and make them even more painful for customers. It's a kind of forced sale, and it's done in public. But one man's pain is another man's gain, and a drop in liquidation rates is an important signal in itself.
3. For now, spot ETFs amplify market signals, not dampen them.
The launch of a spot Bitcoin ETF in the United States has significantly changed Bitcoin's daily trading volume, but contrary to what some crypto analysts believe, it has not yet done much to dampen volatility.
David Lawant, head of research at FalconX, noted that Bitcoin spot and futures trading volumes over the weekend were slightly lower than during President Trump’s Bitcoin bullish speech in Nashville a week ago. The real surge came when the U.S. stock market opened on Monday. JP Morgan noted that the spot Bitcoin ETF experienced its largest net outflow since its launch in January.
This not only highlights that bitcoin trading is becoming an activity that takes place during the trading week rather than weekends, but also that many in the market still view bitcoin as a speculative “risk-on” asset. Tech stocks sold off as the yen carry trade partially unwound after failing to meet the market's eye-popping earnings expectations. Cryptocurrencies fell as well.
ETFs may not be able to tame volatility. Alex Thorn, head of research at Galaxy Digital, argued that bitcoin is a bet on an uncertain future. Bitcoin didn't trade as a store of value like gold because “it's not yet widely held for that purpose,” Thorn said. “The bet on bitcoin is that it may become widely held for this purpose. For the purposes of this paper, think of bitcoin as an early-stage bet on the future of gold. What if you could get in on gold's future 'early'?”
4. It's not over till it's over
If Bitcoin's price moves in tandem with other asset classes, what happens elsewhere matters. The VIX volatility index has been depressed this year, a trend Nomura strategist Charlie McElligott attributes to markets becoming complacent that tightening interest rates won't send the U.S. into a recession. The VIX has retreated from Monday's peak — its highest since the early days of the coronavirus pandemic — but hasn't returned to its year-to-date average of about 14 points.
Some Bitcoin investors may be feeling relieved that the worst is over, with JPMorgan analyst Nikolaos Panigirtzoglou noting that many remain bullish, given the rising open interest on CME and the direction of futures contracts.
In crypto, the Vix equivalent is the Deribit DVol index, which is compiled from trades by professional traders such as hedge funds and proprietary traders.
The Bitcoin and Ethereum DVol indexes are still above this year’s averages, especially for Ethereum.
Few believe the stock market is over the moon yet, and market positioning suggests experts expect further crypto turmoil this month.
What do you think? Contact me by email philip.stafford@ft.com
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Highlights of the week
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Ripple Labs was ordered to pay a $125 million fine for misselling XRP tokens to institutional investors, a total that's just a fraction of the $2 billion sought by U.S. markets regulators but far more than the $10 million Ripple claims it should have paid.
Soundbite of the Week: Trump, Pump and Dump
Another topic this week has been Donald Trump's sons and cryptocurrencies. On Tuesday, DJT, the coin that notorious pharmaceutical executive Martin Shkreli claimed to have co-created with Trump's youngest son, Barron, in June, fell 90 percent in a matter of seconds in a single transaction. In X, Shkreli appeared to blame Barron.
But the more interesting story remains to be fully told.
Donald Trump's sons, Eric and Donald Trump Jr., posted on X on Wednesday, “About to shake up the crypto world with something huge. Decentralized finance is the future. Don't get left behind. #Crypto #DeFi #BeDeFiant.”
This sparked speculation that a Trump-themed coin was on the way, with attention focused on a new token called “Restore the Republic,” and its market cap soared to $155 million, until Eric Trump denied the rumors the next day.
Friends, beware of fake tokens! The only official Trump project has yet to be announced! You will hear about it here for the first time.
Two tokens, two 95 percent drops in one week.
Cryptofinance is edited by Lawrence Fletcher. To see past editions of the newsletter, here
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