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January 22, 2021

Weekly Market Roundup: The great Bitcoin capitulation

Bitcoin has fallen victim to profit taking from the recent all-time high, and is now down close to 16 per cent over the last seven days.

This freefall appears driven in part by a fast money fear of capitulation below $30,000. The put skew has firmed as a result, but it is the dramatic reversal of fortunes for near dated contracts that has exposed the fear fomenting on the street.

Negative gamma also played its part between the $31,000 and $33,000 levels, but with mid-month expiries out of the way, the focus now turns to the far more balanced January 29 contract, aside from the uber bull at $52,000. For that to have any effect, though, spot prices need to stage a dramatic comeback.

Down, but not out

Despite the aforementioned shift higher by the skew, there is still plenty of evidence of bullish positioning. To wit, during the latest market dip, the market appeared to be more bullish on Ethereum than Bitcoin. Specifically, Bitcoin call selling and put buying was the name of the game. At the same time, even though Ethereum options flows were also dominated by call selling, call buying accounted for a decent portion of total flow.

It is also worth pointing out that the amount of Bitcoin locked on Ethereum (WBTC) is back on the uptrend and currently stands at 152,000. WBTC accounts for 110,773, followed by HBTC with 17,905 and then renBTC with 13,065. As such, this may again herald the start of another DeFi boom similar to the wave witnessed last year, as Bitcoin went into range trade.

DeFi’s resurgence may be on the horizon

Looking at the broader market, large caps underperformed small caps on the move lower, with the MVIS large cap index trading up 14 per cent year-to-date (YTD) and small cap index up 38 per cent. Sushiswap (SUSHI) is the largest component of the small cap index and it is up close to 90 per cent YTD.

Despite the choppy week, DeFi market place is widely expected to grow from strength to strength this year and, given the raft of updates that are expected to be released by SUSHI, the competition for dominance versus Uniswap is only going to heat up.

Another asset to watch, going forward, is Kyber Network (KNC), which surged late Thursday after announcing plans for Kyber 3.0, a complete overhaul of its platform. With the 3.0 release, Kyber will transition to become a network of specialized liquidity pools, similar to how different exchanges optimize for different kinds of assets. For example, Kyber 3.0 will allow very high amplification factors for pairs between different wrappers of the same asset, similar to Curve. The team says this would allow a 100-fold improvement on slippage. Other, less stable pairs like Bitcoin (BTC) to Ether (ETH), would be able to benefit from a five-to-ten-fold improvement in capital efficiency.

Similar to Sushiswap, Kyber is also part of the small cap index, albeit with a much smaller index weight. This update may also encourage relative value flow, given the low price/sales ratio at which KNC has been trading lately.

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