Thirteen years ago, crypto was nothing more than a white paper. This past week, the community that has been built around it came close to buying the earliest copy of the U.S. Constitution. That’s quite an achievement for an industry that can’t even get Congress to strike out a provision that would heavily tax it.

It’s still the early innings of the industry, we’ve been told. Maybe our obsession with dog-related memecoins will go somewhere. Maybe not. Maybe countries will embrace the metaverse. Maybe not. It all remains to be seen.

Lucky for us – and humanity – there’s a market for people to stake out their position. And in that market, right now, some of the hotter enthusiasm we saw for crypto, particularly bitcoin, has tamped down a little bit. Perhaps it’s a temporary pullback, but investors aren’t taking on new leveraged long positions the way they were a few days ago. Yet they are still holding on to what levered positions they have now. Will they be liquidated, causing a massive sell-off? Or will the bulls jump in again? That, too, remains to be seen.

– Lawrence

Bananarama may have sung about a cruel summer, but November is turning out to be no great shakes for cryptocurrency investors, either. There are just six weeks left in 2021 and the CoinDesk Bitcoin Price Index (XBX) dipped nearly 20% off an all-time high set Nov. 10.

Yet there’s something interesting in one thing going in the markets right now: leverage. Or, rather, the recent drop-off in demand for it.

After May’s miserable selloff, the demand for borrowing money to go long on crypto took a hit as well. Bitcoin perpetual swaps funding rates – that is, the cost of holding a levered long position in the most liquid offshore derivatives markets – stayed largely negative through the end of July.

As prices began testing the $40,000 level at the end of July, funding rates began to tick up, and the market for perpetual swaps and futures grew. On Aug. 22, the combined open interest in bitcoin futures on BitMEX, Binance, Bybit, OKEx and Huobi broke above $10.4 billion, more than 50% higher than it was 90 days before, just after the May crash. Over the same period, the bitcoin spot price rose by about 30%.

After the spot market peak of $68,990.90 on Nov. 10 (per the XBX), prices fell and the funding rate plunged. Open interest did not. Between Nov. 10 and Nov. 18, aggregate open interest on bitcoin perp swaps and futures fell from $24.9 billion to $22.8 billion, according to Skew – about 8%, far less than the spot-market price drop over the same period. Compare that to the September dip (another drop of around 20% in the spot price). At that time, open interest fell 33% between the local high on Sept. 6 and the bottom on Sept. 27.

So it could be that the latest decline in bitcoin prices may be due not to deleveraging so much as just a lack of demand for leveraged-long positions.

“The balance on futures exchanges is decreasing (fewer collaterals) while open interest remains very high,” said data provider CryptoQuant’s CEO Ki Young Ju to CoinDesk. “There’s no cascade of short liquidations for now. I think the market is likely to go sideways in a broad range to cool off the futures market for the next few days.”

Options traders seem to agree: One-week at-the-money implied volatility in the bitcoin options market, at roughly 73%, is falling toward the rising 10-day realized volatility of 70%, noted Genesis Global Trading in a recent market comment. That's a sign that the market doesn’t expect anything extraordinary – at least, not by crypto market norms.

Some see bullish signals in the market for leverage. “A reduction in leverage smooths volatility,” Marc LoPresti, The Strategic Funds managing director, said on CoinDesk TV’s “First Mover” program on Nov. 18, amid a market lull. “That's a good thing not only for institutional [investors] but for retail holders as well. I think that pattern will continue as we see less leverage usage … we're going to see continued upside.”

Still, it hasn't exactly plummeted. It’s still around where we were a month ago and well above what we saw over the summer. It’s been a fairly orderly decline over the past few days.

Lower rates may entice bitcoin bulls to place levered bets on a rally, but there’s still the threat of a sudden price move, bringing about another round of large liquidations.

In other words, to borrow from Hemingway, a fall in bitcoin price may happen gradually, then suddenly.

Read the column here.

– Lawrence

A message from Copper

KKR, the second-largest private equity firm by assets under management, plans to lead a Series D in Anchorage Bank. TAKEAWAY: Anchorage Bank is a frontrunner in offering institutional crypto custody and services, opening the industry up to larger clients that currently lack access. The investment further shows KKR’s interest in crypto, with previous investments into ParaFi for decentralized finance (DeFi) exposure.

Maple Finance launched a syndicated loan for Alameda Research via DeFi. TAKEAWAY: Lending in DeFi is growing in usefulness as institutions can get access to undercollateralized, fixed rate loans. While over-collateralized loans are useful for leverage within trading, Maple Finance is creating a broader market and onboarding new lenders and borrowers.

Digital Currency Group raised $600 million in debt, shortly after receiving a $10 billion valuation in its latest equity transaction. TAKEAWAY: DCG’s focus on retaining equity could be seen as a positive outlook in the cryptocurrency space. As many firms have been raising cash through equity, DCG has effectively used capital from operation and debt to finance its activities. (DCG is the parent company of CoinDesk.)

OpenSea and Gemini look to raise at $10 billion and $7 billion valuations, respectively. TAKEAWAY: Crypto company raises continue to give multiple companies billion dollar valuations each week, showing a continuation of institutional interest in the industry. It will be interesting to see if the technology maintains investment interest during a period of sustained downtrend in the crypto markets.

Bitcoin’s slide to $57,000 from $69,000 was likely the result of short positions in the derivatives market. TAKEAWAY: Data analysis and market professionals hinted that spot holders have largely been holding bitcoin, with no significant jump in selling pressure. The market might be wary of the upcoming Mt. Gox settlement or Hillary Clinton’s call to regulate the cryptocurrency industry.

– Teddy Oosterbaan

Consensus 2022, the must-attend crypto and blockchain experience of the year, is heading to Austin, Texas, from June 9-12, 2022. This is the only festival showcasing and celebrating all sides of the blockchain and crypto ecosystems, and their wide-reaching effect on commerce, culture and communities. Register now for the lowest price.

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