derivatives

Are stablecoins securities? Well, it’s not so simple, say lawyers

One lawyer said that while stablecoins are meant to be stable, buyers may possibly profit from a range of arbitrage, hedging and staking opportunities.

Recently reported planned enforcement action against the Paxos Trust Company by the United States Securities and Exchange Commission (SEC) over Binance USD (BUSD) has many in the community questioning how the regulator could see a stablecoin as a security.

Blockchain lawyers told Cointelegraph that while the answer isn’t black and white, there exists an argument for it if the stablecoin was issued in the expectation of profits or are derivatives of securities.

A report from The Wall Street Journal on Feb. 12 revealed that the SEC is planning to sue Paxos Trust Company in relation to its issuance of Binance USD, a stablecoin it created in partnership with Binance in 2019. Within the notice, the SEC reportedly alleges that BUSD is an unregistered security.

don’t hate me but custodial stablecoins are probably all securities

I have said this consistently

US securities laws are just insanely broad…https://t.co/JDsB0v93Sw

— _gabrielShapir0 (@lex_node) February 13, 2023

Aaron Lane, a senior lecturer at RMIT’s Blockchain Innovation Hub, told Cointelegraph that while the SEC may claim these stablecoins to be securities, that proposition hasn’t been conclusively tested by the U.S. Courts:

“With stablecoins, a particularly contentious issue will be whether the investment in the stablecoin led a person to an expectation of profit (the ‘third arm’ of the Howey test).”

“On a narrow view, the whole idea of the stablecoin is that it is stable. On a broader view, it could be argued that arbitrage, hedging and staking opportunities provide an expectation of profit,” he said.

Lane also explained that a stablecoin might fall under U.S. securities laws in the event that it is found to be a derivative of a security.

This is something that SEC Chair Gary Gensler emphasized strongly in a July 2021 speech to the American Bar Association Derivative and Futures Law Committee:

“Make no mistake: It doesn’t matter whether it’s a stock token, a stable value token backed by securities, or any other virtual product that provides synthetic exposure to underlying securities.”

“These platforms — whether in the decentralized or centralized finance space — are implicated by the securities laws and must work within our securities regime,” he said at the time.

However, Lane stressed that ultimately each case “will turn on its own facts,” particularly when adjudicating on an algorithmic stablecoin rather tha a crypto or fiat-collateralized one.

A recent post by Quinn Emanuel Trial Lawyers has also approached the subject, explaining that to “ramp up” stablecoins to a “stable value,” they may sometimes be offered on discounted prior to sufficiently stabilizing.

“These sales may support an argument that initial purchasers, despite formal disclaimers by issuers and purchasers alike, buy with the intent for resale following stabilization at the higher price,” it wrote.

*Are Stablecoins Securities? A legal analysis from Quinn Emanuel Trial Lawyers. Source.* *Quinn Emanuel.*

But while stablecoin issuers may resort to the courts to decide the dispute, many believe the SEC’s “regulation by enforcement” approach is uncalled for.

Digital assets lawyer and partner Michael Bacina of Piper Alderman, told Cointelegraph that the SEC should instead provide “sensible guidance” to help the industry players who are seeking to be legally compliant:

“Regulation by enforcement is an inefficient way of meeting policy outcomes, as SEC Commissioner Peirce has recently observed in her blistering dissent in relation to the Kraken prosecution. When a rapidly growing industry doesn’t fit the existing regulatory framework and has been seeking clear pathways to compliance, then engagement and sensible guidance is a far superior approach than resorting to lawsuits.”

Cinneamhain Ventures partner Adam Cochran gave another view to his 181,000 Twitter followers on Feb. 13, noting that the SEC can sue any company that issues financial assets under the much broader Securities Act of 1933:

1/5

This is what people don’t realize.

Howey test = precedent for investment contracts.

“Securities” is a much broader category defined by the 1933 Securities Act.

Honestly, if the SEC wants to, with how vague the act is, its fairly easy to put anything under it. https://t.co/TbHKqO3zLD

— Adam Cochran (adamscochran.eth) (@adamscochran) February 13, 2023

The digital asset investor then explained that the SEC isn’t restricted to the Howey Test:

“The fact that these assets hold underlying treasuries, makes them a lot like a money market fund, exposing holders to a security, even if they don’t earn from it. Making an argument (not one I agree with, but a reasonable enough one) that they can be a security.”

“Worth fighting tooth and nail, but everyone who is shrugging this off as “lol the SEC got it wrong, this doesn’t pass the Howey test” needs to re-eval. The SEC, believe it or not, has knowledgeable securities counsel,” he added.

The latest reported planned action from the SEC comes after reports emerged on Feb. 10 that Paxos Trust was being investigated by the New York Department of Financial Services for an unconfirmed reason.

Commenting on the initial reports, a spokesperson for Binance said BUSD is a “Paxos issued and owned product,” with Binance licensing its brand to the firm for use with BUSD. It added Paxos is regulated by the New York Department of Financial Services (NYDFS) and that BUSD is a “1 to 1 backed stablecoin.“

“Stablecoins are a critical safety net for investors seeking refuge from volatile markets, and limiting their access would directly harm millions of people across the globe,” the spokesperson added. “We will continue to monitor the situation. Our global users have a wide array of stablecoins available to them.”

Stablecoin data points to ‘healthy appetite’ from bulls and possible Bitcoin rally to $25K

Bitcoin price continues to press higher this week as demand for stablecoins and a key BTC price metric suggests bulls have a “healthy appetite.”

Bitcoin (BTC) rallied 11% between Jan. 20 and Jan. 21, reaching the $23,000 level and shattering bears’ expectations for a pullback to $20,000. Even more notable is the move brought demand from Asia-based retail investors, according to data from a key stablecoin premium indicator.

Traders should note that the tech-heavy Nasdaq 100 index also gained 5.1% between Jan. 20 and Jan. 23, fueled by investors’ hope in China reopening for business after its COVID-19 lockdowns and weaker-than-expected economic data in the U.S. and the Eurozone.

Another bit of bullish information came on Jan. 20 after U.S. Federal Reserve Governor Christopher Waller reinforced the market expectation of a 25 basis point interest rate increase in February. A handful of heavyweight companies are expected to report their latest quarterly earnings this week to complete the puzzle, including Microsoft, IBM, Visa, Tesla and Mastercard.

In essence, the central bank is aiming for a “soft landing,“ or a controlled decline of the economy, with fewer job openings and less inflation. However, if companies struggle with their balance sheets due to the increased cost of capital, earnings tend to nosedive and ultimately layoffs will be much higher than anticipated.

On Jan. 23, on-chain analytics firm Glassnode pointed out that long-term Bitcoin investors held losing positions for over a year, so those are likely more resilient to future adverse price movements.

Let’s look at derivatives metrics to better understand how professional traders are positioned in the current market conditions.

The Asia-based stablecoin premium nears the FOMO area

The USD Coin (USDC) premium is a good gauge of China-based crypto retail trader demand. It measures the difference between China-based peer-to-peer trades and the United States dollar.

Excessive buying demand tends to pressure the indicator above fair value at 103%, and during bearish markets, the stablecoin’s market offer is flooded, causing a 4% or higher discount.

*USDC peer-to-peer vs. USD/CNY. Source: OKX*

Currently, the USDC premium stands at 103.5%, up from 98.7% on Jan. 19, signaling higher demand for stablecoin buying from Asian investors. The movement coincided with Bitcoin’s 11% daily gain on Jan. 20 and indicates moderate FOMO by retail traders as BTC price approached $23,000.

Pro traders are not particularly excited after the recent gain

The long-to-short metric excludes externalities that might have solely impacted the stablecoin market. It also gathers data from exchange clients’ positions on the spot, perpetual and quarterly futures contracts, thus offering better information on how professional traders are positioned.

There are occasional methodological discrepancies between different exchanges, so readers should monitor changes instead of absolute figures.

*Exchanges’ top traders Bitcoin long-to-short ratio. Source: Coinglass*

The first trend one can spot is Huobi and Binance’s top traders being extremely skeptical of the recent rally. Those whales and market makers did not change their long-to-short levels over the last week, meaning they are not confident about buying above $20,500, but they are unwilling to open short (bear) positions.

Interestingly, top traders at OKX reduced their net longs (bull) until Jan. 20 but drastically changed their positions during the latest phase of the bull run. Looking at a longer, three-week time frame, their current 1.05 long-to-short ratio remains lower than the 1.18 seen on Jan. 7.

Bears are shy, providing an excellent opportunity for bull runs

The 3.5% stablecoin premium in Asia indicates a higher appetite from retail traders. Additionally, the top traders’ long-to-short indicator shows no demand increase from shorts even as Bitcoin reached its highest level since August.

Furthermore, the $335 million liquidation in short (bear) BTC futures contracts between Jan. 19 and Jan. 20 signals that sellers continue to use excessive leverage, setting up the perfect storm for another leg of the bull run.

Unfortunately, Bitcoin price continues to be heavily dependent on the performance of stock markets. Considering how resilient BTC has been during the uncertainties regarding the bankruptcy of Digital Currency Group’s Genesis Capital, the odds favor a rally toward $24,000 or $25,000.

The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

Bitcoin derivatives data shows room for BTC price to move higher this week

BTC options data suggest that the Bitcoin price rally still has legs, even with wider economic concerns growing and the potential of a brief pause in the crypto market rally.

This week Bitcoin (BTC) rallied to a 2023 high at $23,100 and the move followed a notable recovery in traditional markets, especially the tech-heavy Nasdaq Composite Index, which gained 2.9% on Jan. 20.

Economic data continues to boost investors’ hope that the United States Federal Reserve will reduce the pace and length of interest rate hikes. For instance, sales of previously owned homes fell 1.5% in December, the 11th consecutive decline after high mortgage rates in the United States severely impacted demand.

On Jan. 20, Google announced that 12,000 workers were laid off, more than 6% of its global workforce. The bad news continues to trigger buying activity on risk assets, but Dubravko Lakos-Bujas, chief U.S. equity strategist at JPMorgan, expects weaker earnings guidance to “put downward pressure” on the stock market.

The fear of recession increased on Jan. 20 after Federal Reserve Governor Christopher Waller said that a soft recession should be tolerated if it meant bringing inflation down.

Some analysts have pegged Bitcoin’s gains to Digital Currency Group filing for Chapter 11 bankruptcy protection — allowing the troubled Genesis Capital to seek the reorganization of debts and its business activities. But, more importantly, the move decreases the risk of a fire sale on Grayscale Investments assets, including the $13.3 billion trust fund Grayscale GBTC.

Let’s look at derivatives metrics to understand better how professional traders are positioned in the current market conditions.

Bitcoin margin longs dropped after the pump to $21,000

Margin markets provide insight into how professional traders are positioned because it allows investors to borrow cryptocurrency to leverage their positions.

For example, one can increase exposure by borrowing stablecoins to buy Bitcoin. On the other hand, Bitcoin borrowers can only short the cryptocurrency as they bet on its price declining. Unlike futures contracts, the balance between margin longs and shorts isn’t always matched.

*OKX stablecoin/BTC margin lending ratio. Source: OKX*

The above chart shows that OKX traders’ margin lending ratio increased from Jan. 12 to Jan. 16, signaling that professional traders increased their leverage longs as Bitcoin gained 18%.

However, the indicator reversed its trend as the excessive leverage, 35 times larger for buying activity on Jan. 16, retreated to a neutral-to-bullish level on Jan. 20.

Currently at 15, the metric favors stablecoin borrowing by a wide margin and indicates that shorts are not confident about building bearish leveraged positions.

Still, such data does not explain whether pro traders became less bullish or decided to reduce their leverage by depositing additional margin. Hence, one should analyze options markets to understand if the sentiment has changed.

Options traders are neutral despite the recent rally

The 25% delta skew is a telling sign whenever arbitrage desks and market makers are overcharging for upside or downside protection.

The indicator compares similar call (buy) and put (sell) options and will turn positive when fear is prevalent because the protective put options premium is higher than risk call options.

In short, the skew metric will move above 10% if traders fear a Bitcoin price crash. On the other hand, generalized excitement reflects a negative 10% skew.

*Bitcoin 60-day options 25% delta skew: Source: Laevitas*

As displayed above, the 25% delta skew reached its lowest level in more than 12 months on Jan. 15. Option traders were finally paying a premium for bullish strategies instead of the opposite.

Currently, at minus 2%, the delta skew signals that investors are pricing similar odds for bull and bear cases, which is somewhat less optimistic than expected considering the recent rally toward $22,000.

Derivatives data puts the bullish case in check as buyers using stablecoin margin significantly reduced their leverage and option markets are pricing similar risks for either side. On the other hand, bears have not found a level where they would be comfortable opening short positions by borrowing Bitcoin on margin markets.

Traditional markets continue to play a crucial role in setting the trend, but Bitcoin bulls have no reason to fear as long as derivatives metrics remain healthy.

The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

Bitcoin price rallies to $19K, but analyst says a $17.3K retest could happen next

Bitcoin price hit a year-to-date high near $19,000 as pro traders used leverage to propel the pump, but derivatives data hints at reasons for BTC price to retest $17,300.

Bitcoin (BTC) price has gained 15% in the past 13 days, and during this timeframe, traders’ bearish bets in BTC futures were liquidated in excess of $530 million compared to bulls.

After rallying to $19,000 on Jan. 12, Bitcoin reached its highest price since the FTX exchange collapse on Nov. 8. The move was largely fueled by the United States Consumer Price Index (CPI) expectation for December, which matched consensus at 6.5% year-over-year — highlighting that the inflationary pressure likely peaked at 9% in June.

Furthermore, on Jan. 11, FTX attorney Andy Dietderich said $5 billion in cash and liquid cryptocurrencies had been recovered — fueling hopes of partial return of customer funds in the future. Speaking to a U.S. bankruptcy judge in Delaware on Jan. 11, Dietderich stated that the company plans to sell $4.6 billion of non-strategic investments.

Let’s look at derivatives metrics to understand whether professional traders are excited about Bitcoin’s rally to $19,000.

Margin use increased as Bitcoin price rallied to $18,300 and above

Margin markets provide insight into how professional traders are positioned, and margin is beneficial to some investors because it allows them to borrow cryptocurrency to leverage their positions.

For instance, one can increase exposure by borrowing stablecoins to buy Bitcoin. On the other hand, Bitcoin borrowers can only short the cryptocurrency as they bet on its price declining. Unlike futures contracts, the balance between margin longs and shorts isn’t always matched.

The above chart shows that OKX traders’ margin lending ratio firmly increased on Jan. 11, signaling that professional traders added leverage longs as Bitcoin rallied toward $18,300.

More importantly, the subsequent 2% correction on Jan. 12 that led Bitcoin to a $17,920 low marked the complete margin reversal, meaning whales and market makers reduced their bullish positions using margin markets.

Presently at 21, the metric favors stablecoin borrowing by a wide margin, indicating that bears are not confident about opening Bitcoin margin shorts.

Futures traders ignored the Bitcoin price pump

The long-to-short metric excludes externalities that might have solely impacted the margin markets. In addition, it gathers data from exchange clients’ positions on the spot, perpetual and quarterly futures contracts, thus offering better information on how professional traders are positioned.

There are occasional methodological discrepancies between different exchanges, so readers should monitor changes instead of absolute figures.

Even though Bitcoin broke above the $18,000 resistance, professional traders have kept their leverage long positions unchanged, according to the long-to-short indicator.

For instance, the ratio for Binance traders stood firm at 1.08 from Jan. 9 until Jan. 12. Meanwhile, top traders at Huobi reduced their leverage longs as the indicator moved from 1.09 to the present 0.91. Lastly, at crypto exchange OKX, the long-to-short slightly increased favoring longs, moving from 0.95 on Jan. 9 to the current 0.97.

Traders using futures contracts were not confident enough to add leveraged bullish positions despite the price increase.

Bitcoin price could retest $17,300

While the margin data shows that sizable leverage was used to push Bitcoin above $18,000, it suggests that the situation was only temporary. Most likely, those professional traders deposited more margin and consequently reduced their leverage after the event. In essence, the metric looks very healthy because it indicates that margin markets are not overbought.

As for the top trader’s long-to-short, the absence of demand for leverage longs using futures contracts is somewhat concerning, but at the same time, it leaves room for additional purchasing power.

From a derivatives standpoint, even if Bitcoin retests $17,300, the bulls should not be concerned because the derivatives indicators show little demand from short sellers and no excessive leverage from buyers.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

A key change in Ethereum options pricing hints that ETH price could rise beyond $1,350

Ethereum whales and market makers are no longer charging excessive premiums for protective put options, a sign that ETH price could be en route to new highs.

The price of Ethereum’s native cryptocurrency, Ether (ETH), gained 10.2% from Jan. 4 to Jan. 10, breaching the $1,300 resistance without much effort. But has the Ether price move cast a light on whether the altcoin is ready to begin a new uptrend?

Will Ether’s former resistance level turn to support?

After testing the $1,200 support on Jan. 1, the eight-week ascending channel has displayed strength, but Ether bulls fear that negative newsflow might break the pattern to the downside.

*EETH/USD price index, 12-hour. Source: TradingView*

Despite the positive price trend, the sentiment around Ether and other cryptocurrencies hasn’t been very enticing. For example, Xiao Yi, the former Chinese Communist Party secretary of Fuzhou, confessed on Jan. 8 to “acting recklessly” in support of crypto mining. Xiao spoke from what appeared to be a prison, apologizing for causing “grave losses” to the Fuzhou region.

On Jan. 10, South Korean tax agents reportedly raided crypto exchange Bithumb’s offices to explore a potential tax evasion case. On Dec. 30, Park Mo — an executive at Bithumb’s parent company — was found dead, though he was under investigation for embezzlement and stock price manipulation.

Also on Jan. 10, Cameron Winklevoss, co-founder of the Gemini exchange, issued an open letter to Barry Silbert, CEO of Digital Currency Group. In the letter, Winklevoss makes some serious fraud accusations and requests that the Grayscale fund management holding company dismiss Silbert to provide a resolution for Gemini’s Earn users.

The ongoing crypto winter left another scar on Jan. 10 as the leading U.S. cryptocurrency exchange, Coinbase, announced a second round of layoffs, impacting 20% of the workforce.

However, the exchange’s CEO, Brian Armstrong, tried to minimize the damage by stating that Coinbase remains “well capitalized” and tranquilize investors with business-as-usual messages.

Consequently, some investors believe Ether could revisit prices below $600 as fear remains the prevalent sentiment. For instance, trader Crypto Tony expects the current triangle formation to cause another “leg down later this year.”

$ETH / $USD – Update

Unless we take out $2,200 on the macro level I am treating this as consolidation for a B or X wave, before we get one more leg down later this year

Volume is contracting and I also expect this to dwindle down lower. Pay attention pic.twitter.com/LTik7GXEYa

— Crypto Tony (@CryptoTony__) January 10, 2023

Let’s look at Ether derivatives data to understand if the bearish newsflow has caused traders to avoid leverage longs and neutral-to-bullish option strategies.

Leveraged bulls lagged the recent rally

Retail traders usually avoid quarterly futures due to their price difference from spot markets. Meanwhile, professional traders prefer these instruments because they prevent the fluctuation of funding rates in a perpetual futures contract.

The two-month futures annualized premium should trade between +4% and +8% in healthy markets to cover costs and associated risks. When the futures trade at a discount versus regular spot markets, it shows a lack of confidence from leverage buyers, which is a bearish indicator.

*Ether 2-month futures annualized premium. Source: Laevitas*

The chart above shows that derivatives traders using futures contracts exited the negative premium on Jan. 1, meaning the extreme bearish sentiment is gone. However, the current 1.5% premium remains below the 4% threshold for a neutral market. Still, the absence of leverage buyers’ demand does not mean traders expect a sudden market downturn.

For this reason, traders should analyze Ether’s options markets to understand whether investors are effectively pricing in odds of a $600 retest.

Options traders have stopped overcharging for downside protection

The 25% delta skew is a telling sign when market makers and arbitrage desks are overcharging for upside or downside protection.

In bear markets, options investors give higher odds for a price dump, causing the skew indicator to rise above 10%. On the other hand, bullish markets tend to drive the skew indicator below -10%, meaning the bearish put options are discounted.

*Ether 60-day options 25% delta skew: Source: Laevitas*

The delta skew currently sits at 11% after flirting with the neutral range on Jan. 9, meaning that whales and market makers no longer charge excessive premiums for protective put options. That is a stark contrast from late 2022 when those trades were running up to 19% more costly than equivalent bullish strategies using options.

Overall, both options and futures markets point to pro traders becoming more confident and increasing the odds of $1,300 becoming a support level. So, even if the newsflow doesn’t seem appealing, traders are unwilling to add bearish bets, which might fuel further positive momentum for Ether.

The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

Bitcoin derivatives data suggests a BTC price pump above $18K won’t be easy

The BTC futures premium remains a topic of concern, but it appears that traders are starting to price similar risks for the upside and downside.

Traders might rejoice now that Bitcoin price ventured above $17,400, but 27 long days have passed since Bitcoin (BTC) last breached the $17,250 resistance.

On December 13, after a two-week-long lateral movement, Bitcoin posted a 6.5% rally toward $18,000 and even though the current movement still lacks strength, traders believe that a retest of the $18,250 resistance remains possible.

*Bitcoin 12-hour price index, USD. Source: TradingView*

To start the week, the S&P 500 index rose to its highest level in 26 days on Jan. 9. Weak economic data had previously fueled investors’ expectation of slower interest rate hikes by the U.S. Federal Reserve and the Jan. 12 Consumer Price Index (CPI) report could lend some credence to this expectation.

On Jan. 6, German retail sales data showed a 5.9% year-on-year contraction took place in November. In the U.S., economic activity in the services sector contracted in December after 30 consecutive months of growth. The Services Purchasing Manager’s Index (PMI) reading was 49.6%, and readings below 50% typically point toward a weakening economy.

Investors anxiously wait for the Consumer Price Index (CPI) release on Jan. 12, which is more likely to dictate whether the Fed will raise interest rates by 25 basis points or 50 in early February. Economists expect the report to show inflation increased by 6.6% in the 12 months to December, so a weaker-than-consensus CPI could further boost markets’ performance.

Still, the impacts of a year-long bear market continue to play out as digital asset manager Osprey Funds reportedly laid off most of its staff during the second half of 2022. The investment company offers crypto products for its accredited investors’ brokerage accounts, including a trust.

Analysts should focus on Bitcoin derivatives to understand if the recent positive price action has finally turned crypto investors’ sentiment positive.

The futures premium shows sentiment is slowly improving

The two-month futures annualized premium should trade between +4% to +8% in healthy markets to cover costs and associated risks. Thus, when the futures trade below such a range, it shows a lack of confidence from leverage buyers — typically, a bearish indicator.

*Bitcoin 2-month futures annualized premium. Source: Laevitas.ch*

The above chart shows positive momentum for the Bitcoin futures premium, which recovered from a 3% discount on Dec. 30 to the current positive 1%. Although it is still in the neutral-to-bearish area, it represents less pessimism versus Dec. 13, before Bitcoin price pumped to $18,000. However, the demand for leverage longs at $17,000 is shy according to the metric.

Before jumping to conclusions, traders should also analyze Bitcoin’s options markets to exclude externalities specific to the futures instrument.

Options are pricing similar risks for upside and downside

The 25% delta skew is a telling sign when market makers and arbitrage desks are overcharging for upside or downside protection.

*Bitcoin 60-day options 25% delta skew: Source: Laevitas.ch*

The delta skew bottomed at 8% on Jan. 9, signaling that options traders are pricing similar risks for upside and downside. More importantly, the current level is the lowest since Nov. 8, or since the FTX exchange implosion.

Even if there’s no appetite for leverage longs using Bitcoin futures, the whales and market makers trading options are getting more comfortable with $17,000 becoming support.

Although there is no evidence that a pump to $18,250 is in the making, at least traders are less risk-averse, according to derivatives data.

The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

‘Binance is the crypto market:’ Arcane crowns the exchange 2022’s winner

Following the fallout of FTX, implementing zero fee BTC trading and some notable global acquisitions Binance’s market dominance has surged throughout 2022.

During a year plagued by crises such as the collapse of FTX and Celsius, data shows that crypto exchange Binance has emerged as the clear “winner” of 2022 according to Arcane Research.

A Jan. 3 report from Arcane highlighted that Binance saw its market dominance soar throughout 2022. As of Dec. 28 last year, it had captured 92% of the Bitcoin (BTC) spot market and 61% of the BTC derivatives market by volume:

“There are no other evident ‘winners’ of 2022 other than Binance when it comes to the crypto market structure and market dominance. No matter how you look at it in terms of trading activity, Binance is the crypto market.”

Binance’s BTC spot market dominance was 45% at the start of 2022 meaning that it more than doubled, while its share of the BTC derivatives market increased by almost one third.

*Real BTC daily volume vs Binance spot volume vs Binance market share. Source: Arcane Research.*

The “spot trading volume” is an indicator that measures the total amount of Bitcoin being transacted on spot exchanges on any given day.

The report suggests the increase in Binance’s BTC spot market dominance predated the fallout of the second largest exchange by volume FTX, and began to surge after it removed fees for certain trading pairs on Jul. 7, 2022.

The exchange also made some notable acquisitions to boost its global coverage in 2022 such as the Japanese trading platform Sakura Exchange BitCoin and Indonesian digital currency brokerage firm Tokocrypto.

Binance has been one of the few exchanges to increase the number of staff it employs over the year while its peers such as Kraken and Coinbase have been forced to lay off staff during the current crypto winter.

Looking ahead to 2023, Arcane predicted in a Dec. 30 report that Binance would implement trading fees again in 2023 which would lead to a “normalization of the market dominance.”

As noted in a Jan. 3 report from digital asset data firm CryptoCompare, removing fees allows exchanges to attract customers but they “must be wary to remain profitable” and “cannot employ this strategy for long periods of time without hurting their bottom line.”

Binance could also be subject to increased regulatory scrutiny in 2023 — particularly relating to its native token BNB (BNB) — as following the fallout of the FTX empire, there has been an increased focus on crypto regulations globally.

Analysis from Bitcoin advocate Nic Carter suggested while Binance’s CEO, Changpeng Zhao, has been vocal about his support for exchanges providing proof-of-reserves (PoR), the PoR provided by Binance was incomplete as “it only covers Bitcoin, which only represents 16.5% of their client assets.”

3 ways crypto derivatives could evolve and impact the market in 2023

Derivatives played a major role in the last bull market and it’s highly likely that they will be integral in the market’s evolution in 2023.

Futures and options let traders put down only a tiny portion of a trade’s value and bet that prices will go up or down to a certain point within a certain period. It can make traders’ profits bigger because they can borrow more money to add to their positions, but it can also boost their losses much if the market moves against them.

Even though the market for crypto derivatives is growing, the instruments and infrastructure that support it are not as developed as those in traditional financial markets.

Next year will be the year that crypto derivatives reach a new level of growth and market maturity because the infrastructure has been built and improved this year, and an increasing number of institutions are getting involved.

Crypto derivatives’ growth in 2023

In 2023, the volume of crypto derivatives will continue to grow because of two factors: first, the growth of relevant infrastructure such as applications for decentralized finance (DeFi) and also because of more professional and transparent intermediaries planning to enter the space. Eventually, this will lead to more institutions getting involved.

Understanding why traditional financial institutions use derivatives more than traditional spot markets is an excellent way to learn more about the market.

Some reasons for the growth are the ability to leverage capital, the fact that derivatives contracts in the U.S. are treated as long-term capital gains for tax purposes, and for their use in hedging, which is the ability to protect against unexpected price swings.

When more institutions get involved, relative volatility decreases, making trading derivatives a better use of capital. Also, as more institutions add crypto assets to their balance sheets, derivative instruments will become a critical tool for protecting against short-term volatility.

The industry is still in its early stages

Like 2022, 2023 is also bound to be a unique year for crypto derivatives. There’ll be a rise inboth centralized and decentralized options infrastructure and the continued development of new crypto primitives like structured vaults, everlasting options and experiments with derivatives.

The cryptocurrency industry is moving deeper into regulated markets as it tries to get more users and competes with existing traditional finance companies like brokerages that already let people trade stocks and other financial assets.

Most derivatives deals happen on Binance, OKX and Bybit, which are based outside of the U.S. and are not regulated. However, based on data from CoinGlass, CME Group is the only regulated U.S. market that has gained traction.

In November 2022, it was responsible for about 10.7% of the open interest in Bitcoin (BTC) and Ether (ETH) futures.

Big firms buying will continue buying small licensed derivatives operations

It’s getting harder to tell where retail markets end and institutional markets begin. The retail-focused businesses that crypto exchanges bought are run by some of Wall Street’s biggest and most experienced firms.

In January 2021, Coinbase bought FairX, a small futures exchange in Chicago. The goal of the deal was to make it easier for traders to get into derivatives markets. A retail-focused futures exchange startup called The Small Exchange also released a crypto futures product that requires less cash upfront. Citadel Securities, Jump and Interactive Brokers have all backed the company.

The growth of decentralized derivatives markets

Like centralized venues, perpetual futures comprise most of the volume of decentralized derivatives. First led by Perpetual Protocol and now by dYdX, the daily volume of decentralized perps averages $3 billion per day.

Even though growth has been robust, decentralized perpetual volume makes up less than 5% of all crypto derivatives volume. Over the next two years, we expect this segment to grow in a big way.

**Collect” below the illustration at the top of the page or follow this link.**

As more projects and protocols build on top of decentralized perpetual swap protocols, the value of the platforms that support them will continue to grow. Along with decentralized futures, options and structured products, market participants will be excited to see more crypto-native innovations like everlasting options developed.

Protocols like Deri, which offers both perpetual futures and everlasting options, let users trade derivatives in a very DeFi-native way, giving them the ability to hedge, speculate and arbitrage, all on-chain.

Derivatives could lure in more traditional investors

Institutional traders like these instruments more because they can provide stable returns, similar to fixed income, and these trades are executed with strategies like bull call spreads and covered calls. Also, institutional traders can combine call and put options to set a risk limit without risking liquidation for options trades.

Fidelity Digital Assets now offers their institutional client base the ability to borrow using crypto as collateral so that large companies can add Bitcoin to their assets more easily with the help of these services.

In 2023, it’s likely that crypto will be easier to use as collateral for everyday business, which will allow companies to take on more risk using cryptocurrency derivatives.

Derivatives played an instrumental role in the 2020-2021 crypto bull market for retail and institutional traders. For many investors, borrowing money and using derivatives is the easiest way to increase their bets on a variety of positions. They are available to use in stocks, currencies and commodities, but their use in cryptocurrencies has been steadily growing since 2017.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

3 reasons why Bitcoin is likely heading below $16,000

Reasons for bearishness include U.S. Federal Reserve tightening, the absence of leverage buyers’ demand, and fearful BTC options traders.

December will likely be remembered by Bitcoin’s (BTC) fake breakout above $18,000, but apart from that brief overshoot, its trajectory was entirely bearish. In fact, the downward trend that currently offers an $18,850 resistance could bring the BTC price below $16,000 by mid-January.

*Bitcoin/USD price index, 12-hour chart. Source: TradingView*

A handful of reasons can explain the negative movement, including the reported withdrawal of the Mazars Group auditing firm from the cryptocurrency sector on Dec. 16. The company previously handled proof-of-reserve audit services for Binance, KuCoin and Crypto.com.

Additionally, one can point to the bankruptcy of Core Scientific, one of the largest cryptocurrency miners in the United States, Core Scientific. The publicly listed company filed for Chapter 11 bankruptcy on Dec. 21 due to rising energy costs, increasing competition and the Bitcoin price crash in 2022.

The liquidity crisis at the crypto lender and trading desk Genesis Global and its parent company, Digital Currency Group (DCG), sparked fear among investors. More importantly, DCG manages the $10.5 billion Grayscale Bitcoin Investment Trust. The fund is currently trading at a 47% discount to its net asset value in part due to investor speculation on its exposure to Genesis Global.

Negative pressure from the U.S. Federal Reserve tightening movement

Apart from the bearish newsflow, the macroeconomic scenario deteriorated after the U.S. Federal Reserve hiked interest rates by 50 basis points on Dec. 14. Analysts, including Jim Bianco — head of institutional research firm Bianco Research — said that the monetary authority would maintain its tighter monetary policy in 2023.

Investors fear that Bitcoin could break below the current descending trend support at $16,100, triggering a sharp correction. Th3 Cryptologist, a veteran crypto trader, pointed out a descending wedge potentially causing a $14,000 low by February 2023.

On daily TF I can see this shaping out to be a descending wedge with a potential bottom forming at 14k area. $btc #bitcoin pic.twitter.com/dpPVZZy5Vk

— TH3 Cryptologist (@TH3Cryptologist) December 29, 2022

Looking at Bitcoin derivatives data may help one understand if the price action and recent news have impacted crypto investors’ sentiment.

Bitcoin buyers’ demand using leverage is yet to be seen

The three-month futures annualized premium should trade between +4% to +8% in healthy markets to cover costs and associated risks. Thus, when the futures trade at a discount versus regular spot markets, it shows a lack of confidence from leverage buyers — a bearish indicator.

*Bitcoin 3-month futures annualized premium. Source: Laevitas*

The above chart shows that derivatives traders remain bearish as the Bitcoin futures premium stands negative. Even more concerning, not even the $18,000 pump on Dec. 14 was able to shift those whales and market makers to a balanced leverage demand between longs and shorts.

Still, the lack of demand for leverage buying does not necessarily indicate that traders expect an immediate adverse price action. For this reason, one should analyze Bitcoin’s options markets to exclude externalities specific to the futures instrument.

Options traders getting comfortable with downside risks

The 25% delta skew is a telling sign when market makers and arbitrage desks are overcharging for upside or downside protection.

*Bitcoin 30-day options 25% delta skew: Source: Laevitas*

The delta skew peaked at 23% on Dec. 29, signaling that options traders are uncomfortable with downside risks.

As the 30-day delta skew stands at 18%, both options and futures markets point to pro traders fearing that the $16,100 support will likely be tested.

Therefore, the reasons for investors’ bearishness include the continuation of higher interest rates, the absence of leverage buyers’ demand, and BTC option traders positioning for more downside.

The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Bitcoin bears well positioned for Friday’s $2.5 billion options expiry

BTC bears are outnumbered based on open interest volume, but bulls’ hopes of $20,000 before 2023 have already been hampered.

A year-end wager for $80,000 Bitcoin (BTC) might seem entirely off the table now, but not so much back in March as BTC rallied to $48,000. Unfortunately, the two-week 25% gains that culminated with the $48,220 peak on March 28 were followed by a brutal bear market.

It is important to highlight that the U.S. stock market likely has driven those events, as the S&P 500 index peaked at 4,631 on March 29 but traded down 21% to 3,640 by mid-June.

Moreover, that date roughly coincides with the crisis at centralized cryptocurrency lender Celsius, which halted withdrawals on June 12, and the insolvency of venture capital firm Three Arrows Capital on June 15.

While the fear of an economic downturn has undoubtedly triggered the cryptocurrency bear market, the reckless mismanagement of centralized billion-dollar entities is what sparked the liquidations, pushing prices even lower.

To cite a few of those events, TerraUSD/Luna collapsed in mid-May; crypto lender Voyager Digital imploded in early July; and the second-largest exchange and market marker, FTX and Alameda Research, filed for bankruptcy in mid-November.

In addition, the quasi-tragical sequence of events hit unsuspected victims, including publicly-listed mining companies such as Core Scientific, which was forced to file for Chapter 11 bankruptcy on Dec. 21. Despite the bulls’ best efforts, Bitcoin has not been able to post a daily close above $18,000 since Nov. 9.

This movement explains why the $2.47 billion Bitcoin year-end options expiry will likely benefit bears despite being vastly outnumbered by bullish bets.

Most bullish bets targeted $20,000 or higher

Bitcoin broke below $20,000 in early November when the FTX collapse began, taking year-end option traders by surprise.

For instance, a mere 18% of the call (buy) options for the monthly expiry have been placed below $20,000. Thus, bears are better positioned even though they placed fewer bets.

*Bitcoin options aggregate open interest for Dec. 30. Source: CoinGlass*

A broader view using the 1.61 call-to-put ratio largely favors bullish bets because the call (buy) open interest stands at $1.52 billion against the $950 million put (sell) options. Nevertheless, as Bitcoin is down 19% since November, most bullish bets will likely become worthless.

For instance, if Bitcoin’s price remains below $17,000 at 8:00 am UTC on Dec. 30, only $33 million worth of these calls (buy) options will be available. This difference happens because there is no use in the right to buy Bitcoin at $17,000 or $18,000 if it trades below that level on expiry.

Bears could secure a $340 million profit

Below are the four most likely scenarios based on the current price action. The number of options contracts available on Dec. 30 for call (bull) and put (bear) instruments varies, depending on the expiry price. The imbalance favoring each side constitutes the theoretical profit:

Between $15,000 and $16,000: 700 calls vs. 22,500 puts. The net result favors bears by $340 million.
Between $16,000 and $17,000: 2,000 calls vs. 16,500 puts. The net result favors bears by $240 million.
Between $17,000 and $18,000: 7,500 calls vs. 13,600 puts. Bears remain in control, profiting $110 million.
Between $18,000 and $19,000: 12,100 calls vs. 11,300 puts. The net result is balanced between bulls and bears.

This crude estimate considers the call options used in bullish bets and the put options exclusively in neutral-to-bearish trades. Even so, this oversimplification disregards more complex investment strategies.

Bitcoin bulls need to push the price above $18,000 on Dec. 30 to flip the table and avoid a potential $340 million loss. However, that movement seems complicated considering the ongoing pressure for U.S. regulation and fears of insolvency at the biggest exchanges, despite the recent proof-of-reserves effort.

Considering the above, the most probable scenario for the Dec. 30 expiry is the $15,000-to-$17,000 range providing a decent win for bears.

The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.