Spot ETF Paused but Coinbase's Futures Cleared amid Bitcoin Volatility Coil

• Blue chips posted minor declines, contrasting with sharp decline in alts
• The SEC delayed its verdict on Ark's spot-bitcoin ETF application
• Coinbase received regulatory approval to offer cryptocurrency futures trading in US

Spot-Bitcoin ETF Decision Deferred but Coinbase's Futures Cleared

The crypto markets experienced a week of decline, with the total market cap falling below $1.15 trillion and bitcoin dominance remaining above 49%. While blue chips saw modest decline, altcoins faced significant losses. Bitcoin and ether both recorded week-on-week declines of 2.9% and 2.6% respectively. Within the major dexes, Uniswap saw a drop of 12.9%, and among major DeFi borrow-lending platforms, Compound Finance saw a sharp drop with a weekly decline of 16.3%.

As people on crypto twitter puzzle over the reasons and try to piece together rumors, the answer might be much simpler when we go back to basics. Many conversations and detailed reports have pointed out a big problem of crypto markets’ market structure this year: there's just not enough money flowing around, especially in altcoins. The prevailing market dynamics seem to be predominantly unidirectional and devoid of any favorable catalyst which has led to pronounced and abrupt fluctuations.

Ark 21Shares Bitcoin ETF encountered the latest setback on August 11th as the SEC opted for another 21-day delay. The regulator extended the deadline while initiating a public review of the proposal. As per SEC guidelines, the regulatory body holds the authority to extend ETF application review periods for up to 240 days from the initial filing, allowing for public input or other considerations. Worth noting is the fact that the SEC has yet to grant approval for any spot-bitcoin ETF proposals in the United States, having only begun accepting investment vehicles linked to BTC futures in October 2021. The maximum 240-day extension window provided to the SEC sets ARK's bitcoin ETF final deadline for January 2024, whereas decisions regarding other firms' offerings may not surface until as late as March 2024.

As the verdict on the approval of the spot-bitcoin ETF faced postponement, Coinbase revealed its Wednesday announcement about gaining authorization to provide cryptocurrency futures to customers in the United States. This strategic step enables Coinbase to directly offer bitcoin and ether futures to eligible US clients, broadening the accessibility of such products beyond its institutional customers, which was the case until now. Though the service would not be immediately available in the US, they have started taking names for the wait list. Taking a broader perspective, this development holds the potential to significantly impact crypto engagement among participants based in the United States. With the backdrop of legal actions by US regulators against prominent crypto exchanges, the ongoing concern within the market has revolved around the availability of accessible and liquid derivatives platforms for participants in the US.

Bitcoin's known for turmoil, yet now a volatility coil

According to a Glassnode report, bitcoin's realized volatility has experienced a significant decline across various observation windows, ranging from 1-month to 1-year throughout the year 2023. This decline has led to multi-year lows, with the 1-year volatility window now reflecting levels reminiscent of December 2016. Notably, this marks the fourth instance of pronounced volatility compression:

• During the latter phase of the bear market in 2015, transitioning into the re-accumulation period in 2016
• The late stages of the 2018 bear market, which preceded a 50% sell-off in November. Subsequently, the market saw a recovery rally in April 2019, surging from $4k to $14k over three months 
• Following the consolidation period post-March 2020, as the world grappled with the onset of the COVID-19 outbreak
• End of 2022, marked by the market's response to the FTX failure, coupled with the ongoing market dynamics 

Futures markets are currently displaying a distinct lack of movement, evident in the record-low trade volumes for BTC and ETH. Cash-and-carry yields are marginally higher than the risk-free rate. While bitcoin prices are renowned for their volatility, the present market is witnessing an exceptional compression of both implied and realized volatility. Implied volatility refers to traders' expectations for price turbulence over a specific period. Both Deribit BTC DVOL index and ETH DVOL index are currently hovering near the lower band of their historical range. Dropping volatility is somewhat akin to a recoiling spring. As markets become more coiled, buyers or sellers are ultimately forced to front up. This period of shrinking volatility is often met with violent unwinds – in either direction.

Macro pulse 

Tradfi assets saw a risk off sentiment across the board as markets processed the implications of the Fed minutes, Oil futures plummeted 5.9% this week and US equities fell 1.4% (vs. previous week). The minutes from the FOMC meeting indicated that a majority of officials recognized notable upward risks to inflation and may consider the need for additional tightening measures. The US dollar index rallied 1% and 10 year US treasury yields rose 25bps, while the Gold and Silver index dropped 4.2% week on week.

*Note: Weekly (7 calendar day) performance figures are as of 8am SGT on August 17, 2023 

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