Bitcoin's Ebb, Alts' Flow, and the Derivatives' Big Flippening Show

• Bitcoin options market surpassed BTC futures in notional open interest
• Commerzbank secured the first German full-service bank crypto custody license
• Blockchain.com successfully raised $110 million in Series E funding

Alts continue to outshine bitcoin, and the grand crypto derivatives shape shift

The crypto markets maintained their positive stance, as the total market capitalization of the crypto universe registered a 3% gain. Bitcoin dominance continued its decline, falling below 51.5%, as altcoins consistently outperformed bitcoin for the third straight week. Among the blue chips, bitcoin posted a 6.2% weekly gain, while ether surged by an impressive 9.1% week on week. The market rallied following news that BlackRock filed an application for a spot Ethereum ETF with the SEC.

Amidst the recent focus on price appreciation, it's crucial to delve into the evolving market structure. Since the onset of the last bull cycle, the percentage of bitcoin-margined futures (including perps) contracts has declined from its peak of 70% to 25%, as of this week. This shift is notable because traders, in the past, grappled with spot margin convexity when leveraging futures or perpetual positions with bitcoin. For instance, a trader holding a long BTC perpetual position margined with bitcoin faced the dual challenge of losses on the position and a diminishing margin value. This situation necessitated additional margin postings, and failure to do so could lead to forced liquidation, causing abrupt market movements. In contrast, dollar or stablecoin-margined futures contracts only require traders to manage position P&L without the added complexity of bitcoin's price fluctuations affecting margin values.

This week marked a significant milestone in the bitcoin options market as the open interest notional surpassed that of the bitcoin futures market for the first time. While in well-established markets, options activity typically outshines spot activity, the cryptocurrency markets are gradually moving in that direction. The options volume compared with spot volumes in crypto markets has consistently grown each month this year, although it still has a way to go to match more mature markets. A robust options market provides diverse opportunities for traders, catering to both speculators and hedgers. Reflecting back, this transition does not seem to be entirely surprising. Post FTX failure, the markets underwent substantial deleveraging, and disruptions in the borrow/lending market, combined with rising rates, made access to capital more challenging than ever. Consequently, market participants seeking leverage turned to the options markets.

Among Layer 1 tokens, Solana has continued its robust performance this year, achieving a weekly gain of 51.7%. While Solana has been a standout performer throughout the year, emerging from being one of the most shorted names post FTX, it's noteworthy that AVAX surged by 59.2% this week, more than doubling in the past month. AVAX's momentum gained traction following the unveiling of a proof-of-concept collaboration between Onyx by J.P. Morgan and Apollo Global with Avalanche, aimed at streamlining subscriptions and redemptions for funds offered by the asset management giant Wisdom Tree.

This collaboration is part of Project Guardian, initiated in May 2022 by the Monetary Authority of Singapore (MAS) to explore use cases for asset tokenization. Earlier in the week, MAS announced that, in continuation of these efforts, they will introduce five new pilot programs on asset tokenization. This initiative is part of the government's broader exploration of blockchain use in institutional digital assets trading.

Among the Layer 2 tokens, ZRX, the governance token of the 0x protocol, has surged by 79.1% this week, reaching fresh yearly highs. According to data from the crypto analytics firm Santiment, this rally has been driven by increased whale transactions, which are currently at an 18-month high, with older coins returning to circulation. Additionally, Polygon's native token, MATIC, witnessed a noteworthy rally of 16.8% this week, marking an impressive gain of over 80% in the last month.

Cycle shift in sight, glimmers unwind, POCs' find and regulators' bind

As the market anticipates developments on ETF applications with the SEC, other regulatory bodies are actively progressing, laying the groundwork for regulated crypto markets. Commerzbank AG announced on Wednesday that it has secured a crypto custody license in Germany. This license positions the bank to introduce a "broad range" of digital asset services, with a specific focus on crypto assets. Notably, Commerzbank AG is touted as the first German full-service bank to be granted a Crypto Custody License.

In a similar vein, crypto custodian Hex Trust revealed that Dubai’s Virtual Assets Regulatory Authority (VARA) has awarded them a full license, enabling the provision of crypto custodial services to institutional clients and sophisticated investors. Notably, in August of this year, Hex Trust had previously secured regulatory approval in France. This approval allowed the firm to provide a range of digital asset services, including digital asset custody, buying and selling digital assets for legal tender, and trading digital assets against other digital assets.

In addition, crypto firm Paxos has announced that it has obtained in-principle approval from the Monetary Authority of Singapore (MAS) for a new entity. This entity is set to issue a USD-stable coin in Singapore, ensuring compliance with local regulations and enabling partnerships with enterprise clients for issuing the USD-backed stablecoin in Singapore, similar to Paxos's PayPal collaboration in the US. In August, PayPal launched a USD-backed stablecoin called PYUSD, which is issued by Paxos.

Crypto exchange and wallet provider Blockchain.com has successfully completed a $110 million funding round, resulting in a valuation that is now less than half of its previous $14 billion. The Series E funding round was led by UK-based Kingsway Capital, with participation from Lakestar, Lightspeed Venture Partners, and Coinbase Ventures. Notably, at the beginning of the year, the exchange had undergone a workforce reduction of 28%. While reports of crypto firms downsizing persist, the frequency has significantly decreased compared to the beginning of the year. According to data from DLNews, the number of crypto firms implementing job cuts has dwindled to just two this month, following a peak of 20 in November of the previous year.

As we zoom in on the macro landscape, glimmers of improvement or, at the very least, market optimism are becoming evident. Traditional finance institutions are actively engaging with proofs of concept (POCs) to harness blockchain technology, aiming to enhance operational efficiency. Simultaneously, regulators across the globe are taking center stage in sculpting a more regulated crypto infrastructure, essential for ensuring safety and transparency on a mass scale.  Although access to capital remains a challenge, it has notably eased compared to the earlier part of the year. Moreover, the frequency of workforce reductions within the crypto industry appears to be stabilizing, indicating a potential bottoming-out of such measures. These positive signals collectively paint a promising picture, hinting at the dawn of a new cycle. Yet, the sustainability of the ongoing rally remains uncertain, with numerous unknowns complicating the assessment of whether this upward trend signifies a significant cycle shift. Only time, viewed through the lens of hindsight, will offer a definitive answer.

Macro pulse 

TradFi assets embraced a risk-on sentiment this week, marked by a 1.3% uptick in oil futures and a 2.7% rally in US equities from the previous week. This positive shift was underpinned by inflation data that came in softer than expected, reinforcing the notion that the Federal Reserve might halt its interest rate increases. Elsewhere, the US Dollar index witnessed a 1.1% decline, and 10-year US Treasury yields increased by 3 basis points, while Gold and Silver posted a notable 2.2% gain week on week.

*Note: Weekly (7 calendar day) performance figures are as of 8am SGT on November 16, 2023 

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