Summary of August 2023
In August, broader financial markets experienced corrections amid a strengthening U.S. dollar and weakening risk appetite.The S&P 500 Index registered a 5.1% decline while the NASDAQ Composite Index decreased 7.6%. Additionally, Gold pulled back 4.4% and Bitcoin retraced 11%.
Annual inflation data released in August showed the first notable uptick after a 12-month continual deceleration. Rising energy costs sparked concerns over near-term inflation projections. Investors remained cautious of an impending recession given elevated interest rates, despite the unemployment rate remaining stable at 3.5%.
Diminishing trading activity signaled bearish market sentiment. Records from the Commitment of Traders report indicated that commercial traders on The Chicago Mercantile Exchange (CME) held record high net short positions in Bitcoin, intimating bearishness.
A significant sell-off in Bitcoin occurred on August 16th, resulting in the elimination of $5 billion in Aggregate Open Interest and the cascade of liquidation of long positions worth over $150 million. The deleveraging event reduced approximately 25% of leverage on Bitcoin in aggregate.
On August 29th, a federal appeals court ruled that the U.S. Securities and Exchange Commission (SEC) must reevaluate its rejection of Grayscale Investments' application to convert its Grayscale Bitcoin Trust (GBTC) into an exchange-traded fund (ETF). Bitcoin price reacted positively, appreciating approximately 6%. However, the SEC has yet to approve any applications for a Bitcoin spot ETF. It is reasonable to expect ongoing subdued trading conditions in cryptocurrency markets until the SEC grants approval of a spot Bitcoin ETF.
1.0 Macro Economic Outlook
1.1 Long-dated Bond Yields Surged as Inflation Fears Mounted
The United States Consumer Price Index for July 2023 has shown a notable uptick in its year-over-year inflation rate, rising to 3.29% from 3% in June 2023. This marks the first increase in the inflation rate (CPI YOY) after a consecutive 12-month decline from 8.93% in June 2022.
The uptick in inflation is concurrent with a surge in oil and gasoline prices (see Appendix B), where gasoline pricehas increased over 20% since the the beginning of 2023.
As concern over inflation rises, long-dated Treasury Securities yields have climbed above November 2022 peak, suggesting investors' growing apprehension regarding near-future inflation and higher for longer interest rates policy. Meanwhile, the Unemployment Rate for July has remained relatively stable, registering 3.5%.
1.2 Cryptocurrencies Trailed A Broader Market Correction
The decline in Bitcoin's value in August was concurrent with a broader market correction, including declines in the S&P 500, Nasdaq, and Gold prices. The correction began after the latest Federal Open Market Committee (FOMC) meeting, where Chairman Powell signaled a likely prolongation of interest rate hikes and was exacerbated by the increase in the Consumer Price Index (CPI) for July, which marked the first uptick in 12 months.
2.0 Digital Assets Market Commentary
2.1 Commercial Traders Are at Record High Net Short in Bitcoin CME Futures
Commercial Traders on CME turned net short on Bitcoin in August. Indeed, the net short stance of commercial traders currently represents the highest level recorded thus far in the calendar year 2023. This concentrated shorting behavior among commercial market participants signals apprehension towards favorable near-term price performance for Bitcoin against a backdrop of deteriorating risk sentiment globally. The continued accumulation of short positions by this cohort warrants monitoring.
2.2 Bitcoin Price Dropped Below Short-term Holder Cost Basis
In mid-August, the price of Bitcoin fell below the Short-Term Holder Cost Basis, indicating a potential transition into a downtrend. In the meantime, Long-Term Holder Cost Basis and Realized Price remain relatively unchanged at $20,300.
2.3 Aggregate Circulating Supply of Top 4 Stablecoins Continued to Decline and Number of Total Staked ETH Rose
In August 2023, the combined circulating supply of stablecoins, namely USDT, USDC, TUSD, and BUSD, experienced a continued decline, reaching $114.96 billion by August 31st. Additionally, the Total Value Locked (TVL) in Decentralized Finance (DeFi) also saw a decrease, recording $22.38 billion. However, the total amount of ETH staked continued to rise, registering 29.23M ETH staked. The market capitalization of Bitcoin dropped to $505 billion. Notably, the Stablecoin Supply Ratio Oscillator indicates a neutral price condition for Bitcoin.
2.4 Trading Volume of Popular Cryptocurrency Exchanges
On the 18th of August, there was a spike in trading volume across centralized exchanges (CEXes) and decentralized exchanges (DEXes) following the sell-off on the previous day. Despite this outlier, trading volume, in general, remained subdued in August.
2.5 Bitcoin and Ethereum SPOT/Perpetual FUTURES Trading Volume on Binance
In August 2023, Binance saw continuously diminishing Spot (USDT pair) and Perpetual Futures trading volumes for both Bitcoin and Ethereum. BTCTUSD Spot market trading volume increased slightly compared to July 2023.
2.6 BTCUSDT/ETHUSDT SPOT and Perpetual FUTURES Trading Volume on BYBIT
In August 2023, Bybit saw continuously diminishing Spot and Perpetual Futures trading volumes for Ethereum. The Bitcoin Spot and Perpetual Futures market trading volume increased slightly compared to July 2023.
2.7 BTCUSDT/ETHUSDT SPOT and Perpetual FUTURES Trading Volume on OKX
In August 2023, OKX saw continuously diminishing Perpetual Futures trading volumes for both Bitcoin and Ethereum. The Bitcoin and Ethereum Spot market trading volume increased slightly compared to July 2023.
2.8 Relative Trading Volume of Major Cryptocurrencies in August Remained Stagnant After A Spike During Sell-off
In mid-August, the relative trading volume of Bitcoin, Ethereum, Litecoin, and Bitcoin Cash experienced a notable spike as the market underwent a sell-off. However, the heightened trading activities were not sustained for Litecoin and Bitcoin Cash, and the markets subsequently witnessed a decline in trading volume, with relative volume dropping below 90-Day benchmark, resulting in a subdued trading environment. Trading activities primarily focused on Bitcoin and Ethereum.
2.9 30-day Rolling Volatility of Major Cryptocurrencies, Measured on an Annualized Basis
From on 15th August, the Annualized Volatility of Bitcoin and Ethereum reached its lowest point in 2023. However, the subsequent sell-off led to a spike in their volatility. In light of ongoing macroeconomic conditions constraining risk appetite and the fact that Bitcoin Spot ETF applications are still being processed by the SEC, we anticipate that trading activities will continue to remain subdued.
2.10 Trading Traffic Analysis by 15-Minute Interval
In August, trading activities concentrated during the period between 14:00 - 16:45 (UTC) where London Trading Session overlaps the opening of New York Trading Session. August also saw increased trading activities towards the end of New York Trading Session. The spike in Average Daily Displacement is likely due to the sell-off and a cascade of long liquidations which took place at 21:30 (UTC).
2.11 Bitcoin Aggregate Open Interest, Funding Rate and Liquidations
During August, the U.S. Dollar Index demonstrated strength, coinciding with a decline in Bitcoin's performance. A significant sell-off occurred on August 16th, resulting in the elimination of $5 billion in Aggregate Open Interest and the cascade of liquidation of long positions worth over $150 million. The deleveraging event reduced approximately 25% of leverage on Bitcoin in aggregate. On August 29th, the United States Court of Appeals for the District of Columbia Circuit ruled that the Securities and Exchange Commission (SEC) was obligated to re-examine its previous rejection of Grayscale Investments' application to convert its Grayscale Bitcoin Trust (GBTC) into an exchange-traded fund (ETF). In response to the court's decision, the price of Bitcoin increased by approximately 6%. Additionally, data from exchanges indicated that aggregate open interest across Bitcoin futures contracts grew by $2 billion subsequently. This substantial rise in open interest suggests that speculators may have initiated new positions in expectation that regulatory approval for the first Bitcoin ETF remained a possibility pending the SEC's evaluation.
2.12 Bitcoin Sell-off Order Flow Visualised
A series of liquidation events occurred within a 5-minute timeframe on August 17th, between 21:41 and 21:45 (UTC). The above visualization indicates that the Perpetual Futures market of Bitcoin on Binance exhibited a significant sell-side skew, causing the price to deviate from that of the BTCTUSD spot market during the liquidation period. Furthermore, it is evident that speculative buyers entered the market at 21:45 when the Buy/Sell Skew climbed back above equilibrium. At the same time the price of Bitcoin Perpetual Futures dropped just below its previous low ($24777) on June 15th at 11:17 (UTC) which reasonably triggered remaninng stop-loss and liquidation orders. It is noteworthy that the spot price did not reach its previous low ($24720) from June 15th at 11:17 (UTC).
2.13 Ethereum Sell-off Order Flow Visualised
The above visualization indicates that the Perpetual Futures market of Ethereum on Binance exhibited a significant sell-side skew, causing the price to deviate from that of the ETHUSDT spot market during the liquidation period. Furthermore, it is evident that speculative buyers entered the market at 21:45 when the Buy/Sell Skew climbed back above equilibrium. ETHUSDT Binance Spot also saw a spike in buyside skew at 21:45 where spot buyers stepped in and bought the dip.
2.14 Layer 1s Price Performance (August)
Hedera Hashgraph (HBAR) demonstrated strength amidst the market sell-off, as Federal reserveâs FedNow lists its micropayments platform, Dropp. Most Layer 1 blockchains experienced a decline. Bitcoin and Ethereum recorded an 11% decline, while other popular Layer 1 blockchains also faced a significant downturn.
2.15 Layer 2s Price Performance (August)
Layer 2 blockchains also experienced a sustained sell-off throughout August.
2.16 DeFi Price Performance (August)
Rune demonstrated strength amidst the market sell-off, as most DeFi protocols experienced a sustained decline.
2.17 GameFi Price Performance (August)
Most of the GameFi protocols experienced a sell-off in August.
2.18 CEX Tokens and Memecoins Price Performance (August)
BitMEX Token (BMEXUSDT) outperformed other CEX Tokens. Memecoins tanked.
2.19 September Historically Sees Broader Market Sell-off
The sell-off observed in Bitcoin during August aligned with its historical seasonality for that month. Looking ahead, September is generally characterized as a relatively downtrodden period, with the potential for a broader market downturn such as the S&P 500 and Nasdaq.
2.20 Greyscale Bitcoin Trust Premium/Discount to NAV
As the SEC is required to re-evaluate the application for the conversion of Greyscale Bitcoin Trust into an ETF following a court's ruling, the gap between Greyscale Bitcoin Trust's Net Asset Value and Market Price/Share is narrowing, indicating growing investor optimism towards the recent developments. For your information, GBTC is a closed-end fund that holds Bitcoin. Unlike ETFs, which can create or redeem shares based on investor demand, GBTC has a fixed number of shares. This structure can lead to imbalances in supply and demand, resulting in a discount or premium to the underlying asset's value.
3.0 News Highlights
Open interest on $CRV futures skyrockets amid recent exploit and its founderâs large loan position
SEC sues Hex founder Richard Heart on unregistered securities and fraud allegations
DCG close to reaching agreement on Genesis Capitalâs Chapter 11
Tether reported $850M net profit for Q2 2023
Curve founder deploys new liquidity pool on Curve
Microstrategy plans to raise up to $750M to purchase more $BTC OKX adds new account abstraction feature to its Web3 wallet Six entities have filed applications with the SEC for an $ETH ETF
Curve founder sells $CRV tokens OTC to Justin Sun, DCFGod and others
Binance lists zero-fee BTC/FDUSD and ETH/FDUSD trading pairs
Binance approves Shiba Inu as collateral asset
Coinbase to launch L2 Base on August 9th
Huobiâs stablecoin reserves dipped >30% amid reports of executive arrests
Tether is reportedly the 11th largest $BTC holder in the world
Paypal launches its own stablecoin $PYUSD on Ethereum
Paxos is the issuer of Paypalâs $PYUSD stablecoin
Cathie Wood expects another delay for ARKâs proposed $BTC ETF
Microsoft partners with Aptos to explore innovative solutions related to asset tokenization, digital payments and CBDCs
Europeâs first $BTC ETF gets listed in Amsterdam under the ticker $BCOIN
Crypto custodian Prime Trust files for bankruptcy protection
Chinese Filecoin mining firm charged for orchestrating $83.3M pyramid scheme
SEC delays $BTC ETF approval to early 2024
Valkyrie files for $ETH ETF
SEC to appeal Ripple decision
Hashdex applies for spot $BTC ETF
Binance is considering a full exit from Russia
US appeals court ruled in favour of Grayscale in its ongoing case against the SEC to convert its Grayscale Bitcoin Trust into a spot ETF
X, formerly Twitter has obtained money or currency transmitter licences in seven US states
4.0 September Volatility
5.0 Appendix
Fig. A. Fed Balance Sheet, U.S. Treasury General Account (TGA), Reverse Repurchase Agreements (RRP) and Euro Central Banks Total Assets
The Fed Balance Sheet and total assets of Euro Central Banks continued to contract in August. Additionally, there was a persistent outflow of funds in Reverse Repurchase Agreements (RRP) as investors sought higher yields from short-dated Treasury Securities. As of August 31st, the RRP Award Rate stood at 5.3%, while the 1-month Treasury Market Yield reached 5.55%, the 3-month Treasury Market Yield was at 5.56%, and the 6-month Treasury Market Yield stood at 5.51%.
Fig. B. CPI (YOY), WTI Crude Oil Prices, U.S. Regular All Formulations Gas Price
The uptick in inflation is concurrent with a surge in oil and gasoline prices, where gasoline price has increased over 20% since the beginning of 2023.
Fig. C. Liquidation Heatmap
Liquidation zone above market price:
$32,000 - $34,000.
Liquidation zone below market price:
$22,000 - $24,000.
Source: Hyblock Capital., as of September 1, 2023.
For informational purposes only and should not be considered investment advice or a recommendation to buy, sell, or hold any particular security or cryptocurrency.
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