Derivatives Dominance – Kenetic Trading
This week in Crypto
Bitcoin (BTC) market dominance continued to fade this week as capital moved from the largest cryptocurrency (by traded volume and market cap) to many of the more established altcoins. Tezos (XTZ), Ripple (XRP), Ether (ETH), Cardano (ADA) and Neo (NEO) have all seen impressive gains, with XTZ up a huge 180% since the start of the year.
With volume picking up across the market, BTC dominance looks set to move lower and test the 60% dominance level as highlighted in previous weeklies. We expect new money and the eventual reverse cycle of profit taking from altcoins to flow back into BTC to provide support at 60% — but we are less confident that this holds and a retrace to 50–55% would likely support a continuation of altcoin gains.
Last week we expected ETH to continue its breakout which has proven correct. Talks around JP Morgan merging its Quoram project with ConsenSys adds credibility to public blockchains and Ethereum, with Ethereum’s blockchain having the greatest developer ecosystem and network effects. ETH has performed very well in both USD and BTC terms and after such a painful and aggressive sell off post the ICO madness, are we about to see the steady return of ETH interest and accumulation in 2020?
Derivatives Dominance
The crypto derivatives market continues to provide bullish signals, indicating new or sidelined money is flowing into the crypto markets. The futures market remains heavily in contango as traders increase their leveraged long exposure in anticipation of further market upside. With the March 27th (BitMEX) BTC futures contract trading close to a 4% premium to spot, there are plenty of opportunities for cash-and-carry trading strategies to be deployed, a favorite amongst institutional proprietary trading firms. Risk free arbitrage is a major attraction to traditional capital.
Sticking with BitMEX, which still dominates the market share of Bitcoin derivatives — their flagship product, the BTC perpetual swap, currently has an implied USD cost of ~58% per annum to hold open long positions, further highlighting the growing appetite for exposure to this strong bullish trend as we get closer to “The Halvening” in May. In summary, traders are paying to open leveraged long positions in such quantity that the cost of doing so has reached extremely elevated levels.
Coinbase joined the derivatives party this week as they rolled-out the much anticipated margin trading facility for Coinbase Pro customers across 23 US states. The largest US-based exchange is now offering up to 3x leverage and is said to be working on new institutional trading products this year. They have quite some distance to go however if they plan to catch some of the Asia trading venues in terms of product offering and market share.
Open interest across all BTC futures venues hit an aggregate $5bn for the first time this week, as reported by The Block’s research team. Open interest is the total number of outstanding contracts that have not been settled on an exchange…it is a reflection of the scale of interest in the underlying asset and acts as a proxy for how liquid the derivative contract is.
Clamp down on privacy?
As discussed in last week’s weekly, we are starting to see some push back from exchanges against traders who are using CoinJoin methodologies that are designed to obfuscate source and destination wallets when buying, selling, transacting and moving Bitcoin. We noted that observation of how authorities treat this privacy technology would be important to how Bitcoin evolves as an asset class, especially given we have Taproot/Schnorr making progress.
Last week the current CEO of DropBit, Larry Harmon, was arrested for 1) conspiracy to launder money instruments and 2) operating an unlicensed money transmitting business. The charges relate to his involvement of running Helix, a Bitcoin mixing service that was allegedly used by dark web marketplace AlphaBay.
A couple of key points with this development should be highlighted:
- Helix was a custodial service, so users relied upon and trusted Helix to perform the mixing before sending the coins into the user’s destination address. They would charge a fee for this.
- Helix was allegedly marketing directly to dark web users and was openly advertised as a way to ‘’clean dirty bitcoins’’
It is clear that CoinJoin services are on the radar of regulators and law enforcement but, contrary to social media, this case appears to be less concerned with the actual technology and more concerned with how it was so explicitly used for laundering proceeds of dark web transactions. Full DoJ article here.
Additional to the rather thoughtless marketing, Helix was also a custodial service, meaning that they were responsible for perform the mixing and the subsequent transfer of ‘clean coins’. This is an obvious point of failure for a company that operates a controversial technology service.
If this important technology is to exist to promote the freedoms that society needs, and act against the financial surveillance that is permeating our lives, then positioning and marketing CoinJoin services in a compliant way surely is an obvious first step. Secondly, building non-custodial services is paramount and distances software providers from the action.
Questions still remain how authorities will tackle (or not) the privacy improvements and services to the Bitcoin experience. Surely developers who write open-source code for non-custodial privacy services can’t be prosecuted if proceeds of crime are laundered through it? Much the same as a shop-keeper shouldn’t be prosecuted for taking cash from a drug dealer who is buying groceries.
Taking the other side of this theme, it was encouraging last week to see Fed Chairman, Jerome Powell, add support to confidential cryptocurrency transactions. Whether he actually understands what he was saying is debatable.
“A ledger where you know everybody’s payments is not something that would be particularly attractive in the context of the US.”
We continue to watch the developments in the privacy space, arguably one of the most important themes within Bitcoin and the wider cryptocurrency markets.
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Published at Mon, 17 Feb 2020 09:11:29 +0000
