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April 26, 2021

The crypto culling

Digital and crypto asset markets are down dramatically from the highs set only last week, with attempted rallies mooted by some potentially negative news on the taxation front.

The downtrend that started last weekend appeared to be waning until US President Joe Biden reportedly is set to dramatically increase capital gains taxes on the wealthy. Stock markets immediately sold off and dragged digital assets with them. Surprisingly, because proposing is a far different beast than executing, equities were down less than one percent while cryptos including Bitcoin and ETH dropped more than 10 percent each.

The reverberation of the aforementioned risk off sentiment will also have a negative effect on digital assets, as they appear to still be largely bearish despite a wave of good news from a macro standpoint, including lower unemployment claims in the US than previously forecast, Venmo’s announcement to add cryptos to their payment rails, and the expansion of ETPs and trusts built for an ever-growing contingent of altcoins.

It isn’t all sunshine and roses, though, as reports have emerged out of Turkey that the founder of Thodex, a crypto exchange based in the country, has gone missing with hundreds of millions in customer funds after advertising a 30 percent discount on DOGE bought on the platform during the height of the memecoin’s runup earlier this month. Episodes like this are a reminder that the industry still has a long way to go before maturing to the point institutions can jump in wholesale, and are likely to dampen enthusiasm for crypto through at least the coming weekend.

Mo’ money, mo’ problems

Another factor worth considering is the fact that Credit Suisse has asked investors for up to $2 billion in fresh capital after losses from Archegos Capital Management swelled more than previously disclosed. Whichever way one looks at it, its bad for risk and leverage, albeit too much leverage is also a bad thing.

But, with respect to digital assets, the margin implosion which caused leverage to get drained from equity markets will also likely lead to lower open interest on the CME futures and thus widen the contango spread between the so-called on-shore vs off-shore product offerings. In turn, this will mean that the dominance of coin margined futures will rise as a result, potentially bringing with it an amplification of downside price swings.

On the other hand, stablecoin-margined futures do not exhibit such a convexity profile. It is interesting to note that Ethereum futures are much more dominated by venues that offer stablecoin margined products, than Bitcoin where coin margined venues appear to command more interest.

Another trend worth keeping an eye on is the growth of Binance Smart Chain based DeFi offerings, which clearly demonstrates that availability of capital is not the issue.

The roaring dragon

The rate at which new capital (hot money) was deployed shows how hungry market participants are for yield; and the roll out and subsequent support of Polygon/Matic by DeFi heavyweights in the form of Aave and Curve suggests that Ethereum-based venues may look to recapture some of the surrendered market share.

The scalable narrative is back on the agenda and, with Curve and Aave rolling out support for Polygon, is it only going to increase going forward. As such, expect the likes of Uniswap and Sushiswap to stage a healthy rebound.

In fact, Uniswap weekly trading volume has just surpassed $10 billion mark for the first time. Granted, this is not to say that BSC’s Pancakeswap will be displaced from its current position with highest volume but, equally, it is not a fair comparison given the CAKE’s support from the largest centralised exchange, Binance.

Said otherwise, the total value locked (TVL) on Polygon, Quickswap and others is expected to substantially increase, going forward.

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