UBS

Crypto market momentum stalls as traders await the results of recent regulatory actions

Crypto’s bullish momentum may stall at the $1.2 trillion total market cap resistance, but traders’ newfound caution has not translated to excessive demand for short positions.

Cryptocurrency markets have been trading within an unusually tight 5% range since March 17 as conflicting forces continue to pressure the sector. Consequently, in the past seven days, the total market capitalization gained 3.8%, which was driven mainly by Bitcoin’s (BTC) 3.6% price increase and Ether’s (ETH) 5% gain.

Total crypto market cap in USD, 12-hour. Source: TradingView

On March 27, the United States Commodity Futures Trading Commission sued Binance and Changpeng “CZ” Zhao for allegedly violating trading and derivatives rules, heightening regulatory uncertainty. According to the lawsuit, Binance provided access to leverage for customers trading on the spot and futures markets.

The announcement came just five days after Coinbase received a Wells notice from the U.S. Securities and Exchange Commission, which could target the exchange’s staking program, listed digital assets, wallet and Coinbase Prime services.

Similar actions also occurred outside the U.S., with Japan’s Financial Services Agency (FSA) announcing on March 31 that several foreign cryptocurrency exchanges, including Binance, Bybit, MEXC Global and Bitget, had been operating in the country without proper registration, in violation of the country’s laws.

The lateralization trend that began in mid-March has repeatedly tested the crypto market’s $1.14 trillion market capitalization support. The movement suggests that investors are hesitant to place new bets until more information on the lawsuits against Binance and Coinbase is available.

Risk markets benefited from the inflationary pressure

The global banking crisis forced the Federal Reserve to use two different emergency lending programs. As a result, the Swiss National Bank provided more than $100 billion in liquidity to absorb the impact of Credit Suisse and its subsequent sale to UBS. Stocks and commodities have benefited as traditional finance investors seek alternatives to protect against inflation.

Stocks and commodities have benefited as traditional finance investors seek alternatives to protect against inflation. Since March 15, the S&P 500 index has risen 6.6%, gold has risen 4.6% and oil prices have gained 18.6%. As a result, there are compelling arguments for both an upward and downward trend within the lateral channel, which currently limits crypto’s total capitalization at $1.2 trillion.

Derivatives show mixed trends, but no use of excessive leverage

Perpetual contracts, also known as inverse swaps, have an embedded rate that is usually charged every eight hours. Exchanges use this fee to avoid exchange risk imbalances.

A positive funding rate indicates that longs (buyers) demand more leverage. However, the opposite situation occurs when shorts (sellers) require additional leverage, causing the funding rate to turn negative.

Perpetual futures accumulated 7-day funding rate on April 3. Source: Coinglass

The seven-day funding rate for Bitcoin and Ether was neutral, indicating balanced demand from leverage longs (buyers) and shorts (sellers) using perpetual futures contracts.

Traders can gauge the market’s sentiment by measuring whether more activity is going through call (buy) options or put (sell) options. Generally speaking, call options are used for bullish strategies, whereas put options are for bearish ones.

A 0.70 put-to-call ratio indicates that put options open interest lags the more bullish calls and is, therefore, bullish. In contrast, a 1.40 indicator favors put options, which can be deemed bearish.

BTC options volume put-to-call ratio. Source: Laevitas

The put-to-call ratio for Bitcoin options volume increased to its highest level since March 9, indicating an excess of demand for neutral-to-bearish puts. This is the inverse of what happened on April 1, when call options were in higher demand.

Related: Unwinding the hyperbole: Are US-based crypto firms really being ‘choked’?

Traders are pricing low odds of a break above $1.2 trillion

The market is pricing higher odds of downside in the derivatives market. However, given the balanced demand on futures markets, traders are hesitant to place additional bets until regulators’ actions are clearer. It is unclear whether the total market capitalization will be able to break through the $1.2 trillion barrier, but professional traders are not currently betting on it.

From a derivatives market perspective, traders are pricing higher odds of downside. However, considering the balanced demand on futures markets, investors are uncomfortable placing further bets until there’s a clearer picture of regulators’ actions.

Uncertainty exists as to whether the total market capitalization will be able to surpass the $1.2 trillion barrier, but professional traders are currently not betting on this outcome.

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.

UBS’s acquisition of Credit Suisse brings some good and bad for crypto

Many in Switzerland have said that UBS’ takeover of Credit Suisse was necessary to avoid a calamitous banking crisis like that seen in 2008.

On Sunday, March 19, the 167-year history of banking giant Credit Suisse ended with a takeover by the largest Swiss bank, UBS. Under pressure from the Swiss government, UBS took over its ailing competitor for 3 billion Swiss francs ($3.25 billion) — less than half the $8 billion market value of Credit Suisse just two days before, on Friday, March 17. 

A day later, on March 20, shares in Credit Suisse plunged more than 60% in European trading, with UBS down 9%.

To cover any losses UBS may incur in the deal, the Swiss government will provide $10 billion. The Swiss central bank will also make a $108 billion bankruptcy loan available to the banks.

Swiss publication, the Neue Zürcher Zeitung, called the takeover the “biggest economic earthquake in Switzerland since the rescue of UBS in 2008 and the grounding of Swissair in 2001.” A rescue should prevent a crisis that spreads to other banks, akin to what happened 15 years ago after the bankruptcy of Lehman Brothers in the United States. The takeover of Credit Suisse was “necessary” not only for Switzerland but for the stability of the entire global financial system, argued Swiss Confederation President Alain Berset.

Billion-dollar merger over a weekend

The deal spurred mixed reactions in the Swiss political arena. The Free Democratic Party of Switzerland (FDP) praised it, stating that the takeover was necessary to avoid severe damage to Switzerland as a financial and economic center.

Criticism came from the co-president of the Social Democratic Party of Switzerland, Cédric Wermuth, who tweeted that nothing had changed since the 2008 financial crisis. “The whole financial system is sick and absurd,” he said, adding that the state must step in again and save it.

The “Occupy” movement at Paradeplatz in Zurich, where UBS and Credit Suisse branches are located next to each other. Source: Ronald Zh

Marcel Fratzscher, president of the German Institute for Economic Research, believes the takeover could lead to one giant bank, which would provoke instability across the board in the event of a notional collapse.

In an interview with Die Tageszeitung, the German economist said the current situation is nowhere near as worrying as before the global financial crisis of 2008. “Today, it is the sharp increases in interest rates by the central banks that have taken many financial institutions by surprise and have led to massive losses.”

In other words, the problem today is “not systemic interdependence between financial institutions or inadequate provisioning in terms of liquidity and capital, but unusually aggressive monetary policy.”

‘Regulatory pressure is likely to increase’

“This takeover of Credit Suisse by UBS has sent many into a deep shock,” said Olga Feldmeier, co-founder of Swiss investment platform Smart Valor, speaking to Cointelegraph. Until 2014, she was an executive director and head of sales in the wealth management business at UBS.

“It had been known for a long time that things were not going so well at the bank. But who would have thought that the bank, which was once worth $80 billion, would be the subject of a $3 billion takeover by its arch-rival UBS?” According to Feldmeier, it’s not just the 50,000 employees who are shocked. The lenders have been hit even harder, especially those with a special high-grade bond type — the so-called Additional Tier 1 Capital.

Recent: Best and worst countries for crypto taxes — plus crypto tax tips

But when asked what the alternative would be, Feldmeier agreed that without this takeover, the consequences would be catastrophic. “After all, where is it safe if one of the top 30 systemically important — and Swiss — banks go bankrupt? In a systemic bank run, neither the European Central Bank nor the Fed would be able to help.”

Mauro Casellini, board member at CCA Trustless Technologies Association and, until January 2023, CEO at Bitcoin Suisse Liechtenstein and head of Bitcoin Suisse Europe, shared a similar view.

He told Cointelegraph that it was right that the government and regulators in Switzerland acted quickly to find a solution with the least possible negative impact on the market.

“Although there had been signs for some time that things were not going smoothly at Credit Suisse, it was difficult for outsiders to see just how critical the situation was. It is too early to say whether this was the right solution, but the sheer size of this new ‘super bank’ is impressive and regulatory pressure is likely to increase,” Casellini said.

The good and the bad

The banking crisis has brought some good and some bad for crypto. Despite negative macroeconomic developments, the crypto market performed well when news broke that UBS would take over Credit Suisse. Bitcoin (BTC) won the crypto rally with a gain of 15.5% (reaching $28,671 on March 22). Ether (ETH) gained 3.9%. Driven by the BTC price rally, the share prices of listed Bitcoin mining companies have risen by as much as 120% since the beginning of the year.

According to Feldmeier, it’s a positive phenomenon for crypto exchanges, both big and small. “More trading, higher sales, some of the long missed tailwind would not hurt our industry,” said Feldmeier. “This also increases the certainty that the Bitcoin cycle keeps what it promises — namely, the next bull run around Bitcoin halving in March 2024”.

The loss from clients and investors in traditional financial institutions could positively affect the crypto market as investors turn to alternative assets, such as cryptocurrencies.

However, the Credit Suisse acquisition and the fact that the banking industry faces many different risks and challenges worldwide also has a negative side. Banks are still important partners for crypto companies. If banks are not doing well, they will be even less willing to work with crypto companies or raise fees, which will not make life easier for the crypto industry.

Recent: To be or not to be: Ethics, democracy and morality in the nascent metaverse

The recent closures of fiat on- and off-ramp banks such as Silvergate and Signature, followed by the collapse of Credit Suisse, have created “significant risks for the crypto market,” said Casellini. According to the expert, it was necessary “to address issues such as regulation, security, and transparency to build trust with investors and ensure the long-term viability of the market. Regulation will help our industry in the long run to build a successful and more decentralized alternative to the traditional financial system.”

Casellini also expects to see more challenges and risks in the future due to the changing interest rate landscape and additional requirements on banks.

“It will be interesting to see how governments and especially national banks react, and whether they will save struggling banks or let them fail.”

European banks head into another weekend of uncertainty as default risks surge

An indicator of European bank default risk soars and stocks tumble on March 24 amid renewed fears surrounding the financial system.

European banks are going into the weekend with renewed fears surrounding their future, as shares of Deutsche Bank plunged over 7% on the New York Stock Exchange on March 24 after a down day on Frankfurt’s markets. 

Deutsche Bank shares were impacted by an increase in the cost of insuring against its potential default risk. The German bank’s five-year credit default swaps, known as CDS, climbed 19 basis points (bps) from the previous day, closing at 222 bps, according to Reuters, which cited S&P Global Market Intelligence data. On March 23, the bank’s CDS rose to 173 bps from 142 bps the previous day.

According to Investopedia, a credit default swap allows an investor to swap or offset their credit risk with another investor. Lenders concerned about a borrower’s default often use a CDS to hedge that risk. During periods of uncertainty, market participants generally assign a higher price to protection.

Deutsche Bank’s credit default swaps have soared. Source: MacroVar

Fears about European banks are not limited to Deutsche. UBS’s five-year CDS reportedly jumped up 14 bps on March 24 to close to 130 bps, just a few days after the company acquired troubled competitor Credit Suisse for $3.25 billion as part of an “emergency ordinance” to prevent financial market instability in the region. Under the agreement, the Swiss National Bank has committed to providing UBS with over $100 billion in liquidity.

The rescue of Credit Suisse has not stemmed widespread investor uncertainty about the European banking system. On March 24, shares of Commerzbank declined by as much as 9%, while Société Générale and UBS tumbled over 7% in European trading. Deutsche shares are down over 25% in the past 30 days.

Related: Banks and the Fed have a problem — What about crypto?

“Deutsche Bank [situation] indicates that we are only at the beginning of what looks to be a widening crisis within the Global Banking System,” Danny Oyekan, CEO of digital investment firm Dan Holdings, told Cointelegraph in a written statement. “This shouldn’t be all that surprising given the whipsaw of going from a zero-interest-rate environment to the fastest rate hikes in recent history. So many banks got caught up in a duration trap of sorts, having bought long-dated bonds that have since seen their value eviscerated by the Fed’s rate hikes.”

One of the banks trapped in this environment was the U.S.-based Silicon Valley Bank, which collapsed on March 10, requiring regulators in the United States and the United Kingdom to curb a potential ripple effect across the banking system. However, a similar failure for Deutsche Bank or other European banks is unlikely to happen, according to Ilya Volkov, CEO of the Swiss fintech platform YouHodler. In a comment to Cointelegraph, Volkov said: 

“Silicon Valley Bank was not subjected to the Liquidity Coverage Ratio (LCR) as banks are in Europe. The LCR requires banks to keep enough high-quality liquid assets (HQLA) on hand. This is so that in the event of a high-stress scenario, these assets can be sold to fund banks.”

While the banking industry struggles with uncertainty, Bitcoin (BTC) continues to trade near $28,000 at the time of writing, gaining roughly 17% in the last 30 days. “Bitcoin has performed well in this environment, and this is a testament to its value as a decentralized and secure store of value with a limited supply,” said Oyekan. 

Magazine: Unstablecoins: Depegging, bank runs and other risks loom

UBS Group agrees to $3.25B ‘emergency rescue’ of Credit Suisse

Swiss authorities agreed to change the country’s regulations to bypass a shareholder vote and announce the deal over the weekend.

UBS Group has agreed to buy its ailing competitor Credit Suisse for $3.25 billion on March 19 as part of an “emergency ordinance” to prevent financial market instability. 

An earlier report from the Financial Times claimed UBS had agreed to buy Credit Suisse for over $2 billion, citing a person familiar with the matter. However, a most recent statement from UBS has revealed that the total consideration for the deal is approximately 3 billion Swiss francs, or $3.25 billion. That’s still a deep discount to Credit Suisse’s March 17 market capitalization of 7.5 billion francs, or $8 billion.

“This acquisition is attractive for UBS shareholders but, let us be clear, as far as Credit Suisse is concerned, this is an emergency rescue. We have structured a transaction which will preserve the value left in the business while limiting our downside exposure,” said UBS Chairman Colm Kelleher.

To close the deal, Swiss authorities agreed to change the country’s regulations to bypass a shareholder vote and announce the deal over the weekend, ahead of the market opening.

Also, as part of the deal, the Swiss National Bank has committed to providing over $100 billion in liquidity to UBS, according to reports. 

The discussions were initiated jointly by the Swiss Federal Department of Finance, the Swiss Financial Market Supervisory Authority (FINMA) and the Swiss National Bank, and the acquisition has their full support, UBS said in its statement.

Swiss authorities considered alternatives to Credit Suisse in case the deal with UBS failed over the weekend, including a full or partial nationalization of the bank as an emergency option.

Credit Suisse’s rescue plan would also include losses to bondholders, prompting concerns by European regulators that it would undermine investor confidence in Europe’s financial sector.

UBS and Credit Suisse have been locked in talks with regulators since March 15, after Credit Suisse’s largest shareholder, Saudi National Bank, said that it wouldn’t increase its investment in the Swiss bank due to regulations. Concerns about the bank’s ability to profit were heightened by the comments, raising fears about possible shareholder financing.

Credit Suisse was founded in 1856 to finance the expansion of Swiss railroads. It was considered the second-largest bank in the country.

Update March 20, 2:14 am UTC: Added information from the official UBS statement on the proposed acquisition.

Credit Suisse rescue plan may include nationalization, bondholder losses

A bank rescue plan for Credit Suisse may impose losses on its bondholders and even result in a full or partial nationalization of Credit Suisse Group AG.

A rescue plan for Swiss banking giant Credit Suisse may impose losses on its bondholders and even result in a full or partial nationalization of Credit Suisse Group AG, multiple reports revealed on March 19. 

Swiss authorities are considering applying losses to Credit Suisse bondholders as part of the bank’s ongoing recovery efforts, Reuters learned from two sources. European regulators are concerned that the move might undermine investor confidence in Europe’s financial sector.

Another report from Bloomberg claims that the Swiss government is analyzing a full or partial nationalization of the bank, the only available alternative if the UBS takeover is not completed. Investment bank UBS is Switzerland’s largest bank.

On March 18, the Swiss National Bank and Switzerland’s financial regulator said that Credit Suisse’s acquisition by UBS is the “only option” to prevent a “collapse in confidence” in Credit Suisse. 

The nationalization would be an emergency option due to the complexities surrounding the deal and the limited time available. Swiss authorities are working over the weekend on “emergency measures” to accelerate the deal before Asian markets open, including allowing the deal to proceed without a shareholder vote.

UBS is reportedly asking the government to shoulder around $6 billion on legal costs and potential future losses in the event of a takeover. UBS is offering $1 billion for Credit Suisse, a considerable discount under the bank’s market value on March 17 of nearly $8 billion, according to Companies Market Cap.

Market capitalization history of Credit Suisse, 2001-2023. Source: Companies Market Cap

Swiss authorities are also concerned about job losses due to the deal. According to reports, Credit Suisse was previously considering laying off 9,000 employees to save its business.

Investment company BlackRock on March 18 denied plans or interest in acquiring Credit Suisse. “BlackRock is not participating in any plans to acquire all or any part of Credit Suisse, and has no interest in doing so,” the firm said on Twitter. 

UBS AG launches digital bond settled on blockchain and traditional exchanges

With atomic settlement technology, the company said its digital bond settles through the SIX Digital Exchange (SDX), not requiring a central clearing counterparty.

Swiss investment bank UBS AG introduced its hybrid digital bond on Nov. 3, claiming to be the world’s first publicly traded bond that’s settled on both blockchain-based and traditional exchanges.

According to the bank, the digital bond has the same instrument structure, legal status and rating as a traditional UBS AG senior unsecured note. In its statement, the bank said:

“Through this bond, UBS enables investors, regardless of whether they have the blockchain infrastructure, to invest in a digital bond. This removes a hurdle on the way to adopt new disruptive technology that can make issuing bonds faster, more efficient and simpler.”

The senior unsecured digital bond is a 375 million Swiss franc-denominated ($272 million) three-year bond with a 2.33% coupon, according to UBS. The bank will list the digital bond at SDX Trading and SIX Swiss Exchange. It will be eligible for the Swiss Bond Index, along with other UBS AG senior unsecured notes.

With atomic settlement technology, the digital bond settles through the SIX Digital Exchange (SDX) distributed ledger-based central securities depository (CSD), which is instant and automatic, not requiring a central clearing counterparty. “Investors will have the ability to automatically settle and clear the UBS digital bond on either SDX CSD directly or on SIX SIS,” noted the bank.

Beatriz Martin, UBS’ group treasurer, said that the initiative shows the investment bank’s commitment to supporting the development of new financial market infrastructure using technology, “not just as an enabler, but to make it a true differentiator for UBS.”

UBS moves into the crypto space following comments from the company’s CEO last year classifying crypto as an “untested asset category” and urging caution from investors during the bull market.

Last month, another major traditional financial institution in Europe, Société Générale, was granted approval as a digital asset provider (DASP), allowing the French bank to provide digital assets custody and trading through a subsidiary. The bank joined other international DASP operators such as Bitpanda, Binance and eToro.

UBS raises US recession odds to 60%, but what does this mean for crypto prices?

Analysts believe the possibility of a recession in the US is increasing and this could be an important stress test for cryptocurrencies.

On Aug. 30, global investment bank UBS increased its view on the risk of the United States entering a recession within one year to 60%, up from 40% in June. According to economist Pierre Lafourcade, the latest data showed a 94% chance of the economy contracting, but added that it “does not morph into a full-blown recession.”

Partially explaining the difference is the “extremely low levels” of non-performing loans, or defaults, exceeding 90 days from credit borrowers. According to Citigroup chief executive Jane Fraser, the institution “feels very good about” liquidity and credit quality. Furthermore, Reuters states that the financial industry wrote off merely 0.1% of its loans in the 2Q.

The problem is that even in the now-improbable scenario of avoiding a generalized recession, companies will face diminishing earnings as surging inflation limits consumption and Central Banks increase interest rates while winding down their balance sheets. Either way, the pressure on corporate profits is huge and this puts pressure on stock prices.

The valuation dynamics for cryptocurrencies vastly differ from equities, corporate debt and stock markets. The truth is that there are no set metrics or indicators to guide token prices. Market participants have different perspectives on the protocols and their use cases.

On the other hand, the stock market has battle-tested valuation indicators that have been consistently used for decades, pounded by analysts, pundits and investors. For instance, the price/earnings multiple measures how many years would take a company to generate enough profit to cover its current market capitalization.

Regardless of how one measures the stock market success, it depends on margins, revenues, interest rates and the U.S. dollar foreign exchange rate. That’s why a stock can go down 70% or more even before a recession hits the markets, as it desperately needs a constant inflow of revenues. It’s unlikely that the same rationale is applicable to crypto.

Understanding stock markets and commodities valuation

The first rule of equities valuation is that investors have different inputs, expectations and timeframes for a stock. Sure, there are consolidated models, indicators and analysts’ recommendations, but ultimately, there’s no guarantee that the equity price will follow any rationale.

We can chart the price/earnings multiple, enterprise value/EBITDA or whatever metric investors closely monitor. However, one will never know what the future holds for those companies, even those carrying long-term contracts, such as the energy sector.

Trader’s should not confuse volatility with valuation. A company can have steady and predictable cash flow, but that might become a liability during bull markets when other sectors are growing earnings and expanding. Moreover, a stock market price is never immune to the broader economy because, ultimately, a financial institution’s collapse might as well drag down counterparties.

Let’s take a simple and utopic example: the New York real estate market. If development enters a grinding halt, there is no change in the utility of the land, including houses, commercial and agricultural spaces. If an aggravated crisis causes the rupture, there’s even room for price appreciation since some investors would seek shelter in hard assets.

The same can be said for oil, gold or cattle. There’s no need for a constant flow of earnings to sustain those assets’ value. Worst case scenario, no more gold and oil gets extracted from the ground, but their price will likely increase as the currently available supply diminishes.

What are cryptocurrencies after all?

It does not matter whether investors consider Bitcoin (BTC) and Ether (ETH) as commodities, currencies or novel technology bets. Both assets have extremely limited production schedules, which will be kept even if the hash rate and validators (nodes) drop by 90%. Their use as independent digital asset transmission systems will continue working as planned.

As previously stated, the price of cryptocurrencies might be heavily impacted by an enduring economic recession, but there’s hardly a scenario where the networks become useless due to inflation, rising interest rates or credit defaults. The same rule cannot be applied to Walmart, UnitedHealth Group or Ford Motor Company — all top 20 companies by revenue.

Paradoxically, failing companies are not a suitable store of value during a recession, meaning bankrupt assets can be liquidated and the shareholder gets zero. The decentralization aspect of cryptocurrencies shields investors from even the worst-case scenarios, including delisting from major exchanges.

At the same time, the initial shock of a global recession, for example, the housing market crash and growing distrust in the financial system, could pave the way for alternative hard assets, including cryptocurrencies.

Right now, it sounds like a distant dream, but a full-blown recession would be the first major global financial crisis experienced by cryptocurrencies since Bitcoin’s inception in 2009.

Whether or not crypto valuations will sustain themselves in the long run is still undecided. So far, the sector has endured major market participant failures, including exchanges and lending intermediaries, and during this time, no need for intervention was required. Thus, one could say that it passed its first test, although it’s too early to issue the final report.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.