Bitcoin and Nasdaq Correlation Hit All-Time High

• Price volatility: The sale of Yuga Labs' virtual land crippled the Ethereum blockchain, causing ApeCoin prices to spike and then plummet.

• Market Liquidity: Trading volumes in Turkish lira crypto assets soared to new yearly highs as inflation soared.

• Derivatives: Funding rates rose amid last Thursday's spot sell-off.

• Macro Trend: Bitcoin is almost as correlated to the Nasdaq Tech Index as it is to Ethereum.

hot spots of the week

Terra USD is depegged from the U.S. dollar, and the risk of algorithmic stablecoins is highlighted.

Figure: UST-USD and UST-USDT prices

Data source: Kaiko 15-minute moving average asset price

The TerraUST stablecoin reportedly de-pegged from the U.S. dollar over the weekend amid strong selling pressure following millions of sell-offs. The majority of UST sales are made on stablecoin-centric distributed exchanges and centralized exchanges. The picture above shows the price of UST against USD and USDT, which summarizes the prices of all UST currency pairs on all centralized trading platforms and decentralized funding platforms.

Around 11pm on May 7, UST was trading as low as 0.988 to the dollar. The daily trading volume of UST-USDT has also soared, reaching an all-time high of more than $1 billion. According to reports, the trading platform was forced to temporarily suspend UST trading. Last month, UST became the third-largest stablecoin with a value of around $18 billion, overtaking Binance’s BUSD. However, the huge increase in its transaction volume was mainly driven by the Terra ecosystem's lending protocol Anchor, which provides users with attractive double-digit yields, which also makes people wonder about the sustainability of this model. questioned.

price volatility

Bitcoin trades at 10-month low

Bitcoin was at a 10-month low as of Monday morning , the latest sign that "macro headwinds" and a hawkish Federal Reserve could continue to weigh on risky assets in the near term. Stocks haven't fared much better, with the Nasdaq Composite posting its biggest one-day drop since 2020 and its correlation with Bitcoin reaching all-time highs. Despite the overall bearishness, Binance has had a good week. The trading platform received regulatory approval to operate in France, contributed $500 million to Elon Musk's Twitter takeover bid, and listed the BUSD stablecoin on rival Coinbase.

ApeCoin plummets, Ethereum congested

Figure: ApeCoin price and funding rate

Data source: Kaiko derivatives data

Yuga Labs, the company behind the NFT series Bored Ape Yacht Club, entered the metaverse industry last week with a much-anticipated virtual land sale for its upcoming Otherside metaverse platform. A record $561 million worth of virtual “parcels” were sold in just 24 hours, and these “parcels” were paid for using the associated Token ApeCoin (APE), resulting in a “pump and dump” phenomenon (referring to the soaring price of Token Then there was a market crash), causing the value of APE to soar to a record high before the Token factory was created, and then fell by more than 50%. Funding rates have also dropped sharply, suggesting that traders are actively shorting the token after a highly demanded sale.

Immediately after the release of the NFT, Elon Musk changed his Twitter profile picture to Bored Apes, causing the price of APE to spike by 20%, before he tweeted: "I don't know ...seemed to be a bit homogeneous." Prices then went back to where they were before.

Figure: Ethereum gas fee (handling fee to be paid for Ethereum network transactions)

Data source: Etherscan (Ethereum network blockchain explorer)

APE Coin holders not only incurred losses in the minting frenzy, but also paralyzed the entire Ethereum network, gas fees soared to levels never seen since the DeFi summer, and transactions related to the Token factory consumed more than 180 million The gas fee in USD. Yuga Labs has been heavily criticized for causing confusion at the token factory and has promised to refund fees for failed transactions.

market liquidity

Turkish Crypto Asset Demand Rises Amid Higher Inflation

Chart: Bitcoin price and trading volume in the Turkish market

Data source: Spread between BTC -USD market and BTC-Flat market calculated based on Kaiko reference returns

The recent drop in bitcoin spot prices and geopolitical turmoil are driving the use of crypto assets in inflationary emerging economies such as Turkey, where trading volumes soared to yearly highs in April. Turkey’s inflation rate reached a staggering 70% in April, so Bitcoin’s premium in the Turkish market also rose to 1.7% in early May. The steady rise in BTC-TRY and USDT-TRY volumes since the start of the war in Ukraine also reflects the role geopolitical tensions play in increasing demand for local crypto assets.

The fast-growing Turkish market has attracted the attention of major crypto exchanges such as Binance and Coinbase, which are still looking to expand their presence in Turkey despite Turkey's recent attempts to regulate the industry.

Euro Stablecoins Remain Relatively Low, But Volumes Soar

Figure: Euro Stablecoin Trading Volume

Data source: Kaiko asset price and trading volume (eurs-btc, eurs-eth, eurs-usd, eurt-eur, eurt-usd, eurt-usdt)

Euro volumes soar to all-time highs in 2022, although their volumes are still lower than USD volumes. There are currently only a handful of euro-backed stablecoins on the market, and the chart above is based on the two most traded euro-based stablecoins, Tether Euros and Stasis. Both tokens are operated by private, centralized companies; Tether Euros is a euro-pegged stablecoin backed by Tether, the company that operates USD Tether (USDT).

Obviously, EURT has the largest trading volume on centralized exchanges, and these trading volumes have soared this year. Although from a base point of view, it is much lower than the overall stablecoin market, it is reasonable to expect Euro trading volume to be larger. European traders do not wish to incur any foreign exchange exposure in its transactions. Considering the previous trading volume of USD, we can’t help but wonder why the EUR stablecoin transaction has not adopted the similar return level of USD?

There are two main answers: stricter regulations on stablecoins and their collateral in Europe; and the existing negative return system of the European Central Bank. The ECB’s benchmark deposit returns have been negative for more than a decade, meaning anyone holding Euro and its collateral (i.e. the stablecoin) effectively loses money. One thing to watch is what happens to volumes and the Euro if the ECB decides to go with a positive return, which perhaps was reflected last week: the surge in volumes over the past few months is likely due to expectations The ECB will follow a pattern of rate hikes similar to that of the Fed, but so far this has not materialized.

Depth of market dips ahead of sell-off

Figure: Bitcoin Market Depth

The average quantity of bid and ask prices of market makers is within 2% of the middle price

Data source: Depth of Market on Coinbase, Bitstamp, Bitfinex, Bittrex, ltbit, Gemini and Kraken

The day before Bitcoin’s price plunged 8%, BTC-USD’s market depth fluctuated between 3,400 and 4,400 BTC, within 2% of the mid-price. While liquidity conditions remain lower than earlier in the week, the crash itself has had no appreciable impact on market depth as market makers are cautious before re-holding positions, which would allow the sell-off to persist. After an initial dip, the price of bitcoin continued to fall over the weekend. However, on May 7th, we saw an improvement in Bitcoin’s liquidity situation, gradually returning to pre-crash levels.

Derivatives

Funding rates trend higher during the sell-off

Figure: Funding rate of Bitcoin perpetual contract vs spot price

Data source: Funding rates of Binance, Deribit, Bybit, FTX, OKEX trading platforms, 24HMA

So far this year, BTC funding returns have remained largely stable amid Bitcoin’s sideways volatility and low derivatives trading volume. In the bull market last year, traders raised the futures price, making the futures price higher than the spot price, and the funding rate increased strongly. Recently, however, we have noticed a shift in this trend, as exemplified by last week's sell-off, which saw funding rates increase despite bearish market conditions. A possible explanation is that the spot market sold off faster than the futures market, causing funding rates to keep growing, suggesting that the bearishness was driven by the spot market.

Open interest in Bitcoin perpetual contracts showed resilience last week, despite volatility in the spot market spurring more than $300 million in long liquidation.

Figure: Bitcoin Perpetual Contract Open Interest

Data source: Kaiko derivatives 24-hour moving average data

The chart above lists the cumulative open interest of four exchanges — Binance, Deribit, FTX, and Bybit. We found that between May 4th and 8th, the amount of open interest decreased by only 8% to $7.7 billion, while the spot price fell by 13% during the same period. Overall, open interest has fallen more slowly this time around than in previous sell-offs.

macro trend

Bitcoin and Nasdaq Correlation Hit All-Time High

Chart: Correlation between Bitcoin and Nasdaq Index

Data source: Kaiko correlation index

Risk assets continued to move in tandem after the Federal Reserve raised its key policy return by 50 basis points last week, the biggest rate hike in about two decades. Bitcoin’s rolling correlation with the tech-focused Nasdaq 100 recently hit an all-time high of 0.8. This is close to the traditionally strong correlation between Bitcoin and Ethereum, which is also rising and is currently around 0.9.

However, despite being closely correlated with the Nasdaq 100, Bitcoin has been performing slightly better since the start of the year. We note that Bitcoin tends to outperform tech stocks when inflation expectations increase, which may add credibility to BTC’s role as an inflation hedge.

Figure: Ratio of Bitcoin and Nasdaq Index vs. Inflation Expectations

Source: Kaiko Refinitiv Fred Asset Price

We plot the ratio of Bitcoin to the NASDAQ index and the 5-year inflation expectation (a market-based indicator) together to plot the above graph, predict the inflation rate in the next 5 years, and observe the trend of change. However, it could also mean that Bitcoin is seen as a riskier asset that is more affected when the Fed’s credibility to fight inflation increases.

Chart: 30-day volatility of Bitcoin and Bitcoin suppliers

Data source: Refinitiv Asset Prices

Bloomberg (Bloomberg) reported last week that "Bitcoin miners have shifted their thinking to generate a yield-generating strategy in traditional finance, using their bitcoin holdings to make money by selling bitcoin call options." Issue BTC call options. If the call option expires and is not exercised, it will lose value, but it will generate returns to the supplier. If the BTC price rises rapidly, the profit of the supplier will be limited. As a result, one would expect the volatility of the provider to be lower than that of BTC itself, all else being equal. However, as the chart above shows, they have all become more volatile, especially Chinese company Canaan, whose shares have seen significant volatility.

Original Author: Kaiko