RESEARCH
BEQUANT Crypto&Coffee
It was a frustrating week for the bulls as market participants grappled with yet another mixed bag of news flow. The initial move higher came in the wake of reports that Grayscale’s Ethereum Trust became the second Grayscale entity to be registered as an SEC reporting company, together with Ethereum launching yet another dress-rehearsal testnet for the upcoming Ethereum 2.0 launch. Fundamentally, initial market reaction conferred to the bullish outlook for Ethereum, more so than Bitcoin. After all, Ethereum is the fundamental building block of the new playground that is DeFi for traders, with Bitcoin sitting comfortably in the passenger seat. As evidenced by the growing deployment of Bitcoin on Ethereum network, where at the time of writing just over 140k Bitcoins were locked. The catch-22 situation arises from the fact that to hedge the said DeFi exposure, market participants turn to various option or futures structures and as the size of such structures increases with increased activity in the DeFi ecosystem, it inadvertently caps short-term upside. This is particularly clear when looking at the options skew profile of Ethereum. Still, as per Coingecko, in Q3, the DeFi & yield farming hype pushed trading volumes on decentralized exchanges up to new highs. Monthly trading volumes for the top 10 DEX increased from $3.8 billion in July to $30.4 billion in September, a 700% increase. At the same time, volumes on CEX held at around $300bln in September and a similar figure in August. The market share that DEXes command is expected to grow going forward, largely at the expense of CEX venues, this will also drive further market fragmentation but the silver lining to all this is that it will also likely spur on the growth of layer 2 scaling solutions. On that note, Aztec announced the launch of Aztec 2.0, the Layer 2 Network — a scaling solution, with privacy at its core. Among the features list, it includes zkRollup based Layer 2 network, live on Ropsten, Private sends by default — shield and send your ERC-20s privately, social-key recovery baked in, scalable private access to DeFi (Uniswap, etc.), 200x gas reduction compared to Aztec 1.0 and secure by design: all transactions are validated on-chain. It is worth highlighting that value deposited in Loopring (LRC), a DEX built using zkRollup scaling tech, is up by 70% to $17M in the past 90 days. The total value locked in higher than that of Kyber and Bancor. Watch this space! Back to the market price action and all the hard work that the bullish camp had to endure to get the futures curve to steepen ended up in tatters on Friday in the wake of the news that a major exchange, OKEx, has suspended all cryptocurrency withdrawals indefinitely. It was noted that one of the exchange’s key holders has “been out of touch” with the exchange because they are “currently cooperating with a public security bureau in investigations.” OKEx’ CEO later said the investigation is due to the key holder’s “personal issue.” To make matters worse for the already jittery markets, Deribit exchange was also out of action temporarily due to maintenance being carried out. The lack of clarity over the situation at OKEx resulted in another relapse of sentiment, with Bitcoin falling around 3% and the futures curve flattening yet again. At least market makers were left relieved to see Bitcoin below $11,500, given the large gamma at play for the mid-month expiry (thereby if spot remained above this level market makers would have had to close hedges pushing the spot even higher).
