Risk is off the table

Risk, leverage and speculation could be considered the keywords for 2021 as excess cash from the covid stimulus entered the stock market and crypto ecosystem. Since then, many traditional financial assets have returned to their pre-Covid levels, with the Ark Innovation ETF, public stocks like Coinbase, and Bitcoin mining stocks hitting all-time lows. However, Bitcoin is still up around 5x from its covid lows.

BTC, Ark Innovation ETF and Coinbase price: (Source: TradingView)

The introduction of derivatives was a big part of the 2021 bull run, allowing investors to take additional risk and speculate. One pathway is futures open interest, the total amount of funds (USD value) allocated in open futures contracts.

The 2021 bull run saw 72% of all collateral used for futures open interest was crypto margin, i.e. BTC. As the underlying asset is volatile, this would add more volatility and risk to the leveraged position.

Crypto Margined Futures Open Interest Percent: (Source: Glassnode)

However, as 2022 approached and risk collapsed, investors used as little as 34% of the margin in cryptocurrencies. Instead, they opted for either fiat or stablecoin to hedge against volatility, as neither instrument is naturally volatile. Crypto margin has been less than 40% since the Luna collapse, indicating risk aversion and has held steady for the remainder of 2022.

Drastic divergence in futures between 2021 and 2022

Perpetual swap funding rates during 2021 were mostly from long investors and indicated that investors were becoming more bullish on BTC. However, funding rates in 2022 have muted a bit compared to 2021.

The average funding rate (in %) set by perpetual futures contract exchanges. When the rate is positive, long positions periodically pay short positions. Conversely, when the rate is negative, the short positions periodically pay the long positions.

Futures Perpetual Funding Rate: (Source: Glassnode)

Areas where investors are going in the opposite direction and shorting the market are highlighted. It just so happens that it coincided with the events of the black swan. Covid, China banning BTC, Luna, and the collapse of FTX saw a huge short premium. This is usually a BTC cycle low or a local low as investors try to send BTC as low as possible.

As a result of lower leverage in the market, liquidations in 2022 have been muted compared to 2021, when investors were liquidated for billions of dollars in early 2021; 2022 is now just millions.

Total futures liquidations: (Source: Glassnode)

Volatility and put option premiums eroded

Implied volatility (IV) is the expectation of market volatility. Given the price of an option, we can solve for the expected volatility of the underlying asset.

Over time, watching At-The-Money (ATM) IV provides a normalized view of volatility expectations, which will often rise and fall with realized volatility and market sentiment. This metric shows the ATM IV for option contracts expiring 1 week from today.

After the chaotic year of 2022, the Bitcoin ecosystem is seeping into a quiet December. Options volatility has crashed, which it has done after every black swan event, currently at multi-year lows of 40%.

ATM Options Implied Volatility – 1 week: (Source: Glassnode)

This chart presents the Put/Call ratio for the options markets, presented for open interest (red) and traded volumes (blue).

When there is risk and volatility, put options tend to be placed at a higher premium, as can be seen below. After the collapse of Luna and FTX, the put option premium plummeted, which has also been a good indicator during this bear market.

Put/Call Options Ratio: (Source: Glassnode)

Retailer taking self-custody

The illiquid supply has just passed through 15 million coins held in hot or cold storage wallets. Since the circulating supply of BTC is around 19.2 million, this would represent 78% of all coins in the circulating supply held by illiquid entities.

Non-liquid supply: (Source: Glassnode)

Self-custody has been a central focus due to the FTX crash, and over the past three months, the illiquid supply exchange rate has been the highest in over five years, showing that coins are exiting exchanges.

Iliquid supply change: (Source: Glassnode)

Understanding investors withdrawing their coins from exchanges is done through the metric, Net Transfer Volume To/From Exchange Breakdown by Size.

Selecting less than $100k hints at retail transactions, with $160 million being withdrawn multiple times during the FTX crash and, more recently, a large number of withdrawals from Binance, the week beginning December 12.

Breakdown of net transfer volume to/from exchanges by size: (Source: Glassnode)

Mass exodus of coins leaving Binance

Binance saw unprecedented coin outflows this week, leaving its exchange. Proof of reserves from him fell by $3.5 billion, while withdrawals of Ethereum-based tokens amounted to more than $2 billion. However, they managed the redemptions and withdrawals without any problems.

Binance faced the largest stablecoin outflows (BUSD+USDT+USDC) in 24 hours, amounting to $2.159 billion.

Stablecoin exchange balance: (Source: Glassnode)

Binance has seen more than 65,000 BTC leave its exchange in the last seven days. While their exchange balance dries up, they still hold around 3% of Bitcoin supply on exchanges, just as Bitcoin supply on exchanges falls below 12% for the first time since January 2018.

Percent balance on exchanges: (Source: Glassnode)

This post Bitcoin Deep Dive: 15M BTC In Self-Cut As Binance Withdrawals Peak, Derivatives Switch To ‘Risk Free’

was published first on https://cryptoslate.com/market-reports/bitcoin-deep-dive-15m-btc-in-self-custody-as-binance-withdrawals-peak-derivatives-switch-to-risk-off/


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