Thursday, 2 February 2023

Market Summary

Market Summary 2 February 2023

Bitcoin Price: US$ 23,732.66 (+2.63%)
Ethereum Price: US$ 1,641.68 (+3.55%) 


Protocol Update: Examining Frax Finance’s “DeFi Trinity”

  • Frax’s USD-pegged stablecoin has grown to become the fifth largest stablecoin, with a market capitalization of $1B. The market cap dipped meaningfully after the UST crash last year, which sent demand for FRAX lower due to concerns about algorithmic stablecoins. Although the FRAX supply hasn’t quite recovered to ATHs, it is still the largest stablecoin in the market with an algorithmic component.
  • FRAX is not truly an algo-stable in the way UST was. It’s partially backed by collateral and the protocol’s native governance token, FXS. Each FRAX token can be minted and redeemed from the protocol for $1 of value. The collateralization ratio indicates the proportion of collateral that backs FRAX. This number sits at 92% currently, up from 82% a year ago. This means that every FRAX minted requires $0.92 of collateral and $0.08 of FXS burnt. A higher collateralization ratio versus a year ago reflects comparatively lower demand for FRAX.
  • FRAX’s decentralization ratio (DR) is 22.5%. The DR is the ratio of decentralized collateral value over the total stablecoin supply that can be redeemed for those assets. Put simply, it represents the proportion of collateral value coming from decentralized sources. Centralized stablecoins like USDC and USDT are counted as 0% decentralized, while assets like ETH, CVX, or lending AMOs where borrowers overcollateralize their loans with sOHM are considered 100% decentralized.
  • A decentralization ratio of 22.5% means that FRAX’s collateral backing heavily relies on censorable assets — even more so than stablecoins like LUSD and DAI, which have ratios of 100% (being backed fully by ETH) and 33%, respectively.
  • Although FRAX’s decentralization ratio is far from ideal and collateralization has increased from last year, this can be interpreted as a system that works to manage the price stability of FRAX. Over the same period, FRAX has barely deviated from its $1 peg, managing to survive the LUNA/UST fallout and recent market downturn. So while the reliance on centralized assets isn’t great, Frax’s ability to adjust its collateralization and decentralization ratios according to market conditions has proven to be an advantage in keeping FRAX’s price peg — by far the most important thing for a stablecoin.
  • Continue on Delphi…


Bitcoin bulls plan to flip $23K to support by aiming to win this week’s $1B options expiry

  • Bitcoin’s price has been trading above $22,500 for 12 days. Of course, this situation can change even if Federal Reserve chair Jerome Powell issues positive statements about the economy in today’s post-FOMC presser. 
  • Even if the decision matches the market consensus, the post-meeting statement should be investors’ primary area of focus. Specific areas to focus on would be clues for the next meeting in March.
  • Troubling news for the largest stablecoin Tether (USDT) could also cause a meaningful impact after a Celsius bankruptcy examiner report showed that “Tether’s exposure eventually grew to over $2 billion” in September 2021. However, it is unclear if iFinex — Tether’s issuer — suffered any losses. iFinex chief technology officer Paolo Ardoino denied exposure to Celsius and suggested that the examiner had “mixed up” prepositions in the report.
  • Legendary portfolio manager Michael Burry, known for being one of the most vocal critics of the subprime mortgage crisis from 2007 to 2008, posted a short note on Twitter on Feb. 1, suggesting that investors “sell.”
  • While the message lacks a supporting thesis, one could conclude that Burry expects a meaningful correction in traditional markets. Considering the 40-day correlation between Bitcoin and the S&P 500 index at 75%, the odds of a BTC price retrace become evident.
  • Consequently, this week’s $1 billion BTC options expiry on Feb. 3 can go either way because bears can still flip the tables even though the tide currently favors the bulls.
    • Between $21,000 and $22,000: 2,700 calls vs. 10,700 puts. The net result favors the put (bear) instruments by $165 million.
    • Between $22,000 and $23,000: 4,400 calls vs. 4,200 puts. The net result is balanced between call and put options.
    • Between $23,000 and $24,000: 7,800 calls vs. 100 puts. The net result favors the call (bull) instruments by $180 million.
    • Between $24,000 and $25,000: 12,400 calls vs. 0 puts. Bulls extend their gains to $300 million.


Retail giant Pick n Pay to accept Bitcoin in 1,628 stores across South Africa

  • South African grocery retailer Pick n Pay is now accepting Bitcoin in all of its 1,628 stores following a three-month pilot testing phase in 39 locations. 
  • As part of its nationwide rollout, store customers will be able to pay for items using cryptocurrency via smartphone apps or by scanning a QR code and accepting the South African rand’s conversion rate at the time of payment.
  • To pay with BTC, customers will need a Bitcoin Lightning Wallet and the CryptoQR scanner app from CryptoConvert, which is linked to the Bitcoin Lightning Wallet. The payment process requires users to scan an item’s QR code through the CryptoQR app and then proceed to the Lightning Wallet to confirm the rate and complete the transaction.


Federal Reserve Lifts Interest Rates Another 25 Basis Points

  • Matching market expectations, the Federal Reserve’s Federal Open Market Committee (FOMC) hiked its benchmark federal funds rate by 25 basis points to a range of 4.5%-4.75%.
  • Hovering in a narrow range on either side of the $23,000 level for the past several days, the price of bitcoin (BTC) remained in that area shortly after the announcement.
  • With the 25 basis point rate hike largely priced in, markets were looking for clues in the accompanying policy statement about whether the central bank was mulling a pause in its monetary tightening cycle. For now, that doesn’t appear to be the case, with the FOMC saying “ongoing increases” in rates will be necessary.
  • Interest rate futures markets are currently pricing in a terminal fed funds rate of 4.94%, suggesting the Fed has another one or two 25 basis point rate hikes left before hitting the brakes.


Bitcoin and Hang Seng’s Stalled Rally Might Mean Wider De-Risking Ahead, TradFi Firm Says

  • Bitcoin’s (BTC) ascent that began a month ago has hit a wall this week, with upward momentum running out of steam near key technical resistance. A similar pattern has emerged in Hong Kong’s benchmark equity index Hang Seng.
  • That has one traditional finance (TradFi) observer mulling a possibility of a renewed risk aversion across all corners of the financial market.
  • “Failures in BTC and Hang Seng are technical warnings signs that these early 2022 halcyon vibes may not last all year,” Brent Donnelly, trader and president of Spectra Markets, said in a note sent to clients late Monday.
  • Donnelly’s comments are evidence of bitcoin’s strengthening reputation as an advance indicator of risk sentiment among seasoned traders. In the past, the world’s largest cryptocurrency has led major tops and bottoms in the S&P 500 by several weeks.


Bitcoin Could Be in the Later Stages of the Bear Market, On-Chain Data Suggests

  • Bitcoin’s (BTC) recent uptrend was met with euphoria and skepticism as prices rallied 40% in the past month – despite ongoing contagion effects spread by the fall of centralized crypto players.
  • Bitcoin slipped to as low as $15,700 in November as the crypto market deal with the insolvency of crypto exchange FTX and bearish sentiment in global stock markets. Prices mostly ranged between $15,700 and $17,500 until the first week of January.
  • The cryptocurrency has surged since then, alongside growth in ether (ETH), decentralized finance (DeFi) markets and the broader equity market. Before retreating, bitcoin reached five-month highs above $23,500 earlier this week as traders took profits.
  • However, some analysts say that while overall market sentiment cannot be called bullish just yet, the recent price and on-chain data suggests that bitcoin could be in the later stages of a bear market.
  • “Although current bitcoin performance suggests that the bottom might already be in, we are not out of treacherous waters yet, as we have not seen a full year pass since the 2022 bear market rally,” analysts at crypto exchange Bitfinex said in a markets note this week.
  • “Early 2020, before the third bitcoin rally of eight green candles, was a time of massive volatility amongst bearish macro conditions; this might be what we experience now in the first and second quarters of 2023,” the analysts added.
  • The note cited Glassnode that suggested short-term holders (STH) of bitcoin selling now at profit while long-term holders (LTH) continue to hold massive spot positions – a move that “looks increasingly bullish for bitcoin.”

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