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Weekly: Back to the Futures

Volatility has returned to crypto, and futures markets are front and center

August 25, 2023

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Key takeaways

  • Perpetual futures volumes on Coinbase International Exchange have risen 64% over the last two months.
  • Total open interest for BTC and ETH perps across other non-US exchanges has declined to a notional value of $12.2B following last week’s liquidation cascade.

Written by

  • David Duong, CFA, Head of Institutional Research

Market View

Following the sharp sell off in crypto markets last week, volumes in perpetual futures contracts (perps) on Coinbase’s international exchange have normalized to a daily average of around US$120M over the last five days. This is down from a daily average of $165M the previous week (August 13-19), when we saw a two-day surge in volumes to $260M and $287M on August 17 and 18 respectively amid (what we viewed as) a primarily liquidation driven market (see chart 1). Month-to-date, daily perp trading volumes on the Coinbase International Exchange have averaged $127M in August compared to $92M and $63M in June and July, suggesting activity on the exchange has picked up by 64% over the last two months.

This is incongruent with what we’ve seen on other non-US exchanges where net daily trading volumes in BTC and ETH perps have been declining month-on-month, down over 31% between June and August (see chart 2). In part, that disparity in growth can be explained by the fact that Coinbase International Exchange only launched in May of this year, so volumes are starting from a lower base. But a lack of volatility in recent months, up until last week, have also kept market players on the sidelines. Total open interest for BTC and ETH perps across these non-US exchanges has declined from a notional value of $17.8B prior to last week’s liquidation cascade to under $12.2B as of August 24. We believe that additional large liquidations should be limited as open-interest weighted funding rates have returned to positive territory for both bitcoin and ether to an average +0.20% and +0.33% respectively over the last three days.

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Among traditional futures, we saw an increase in institutional participation of CME ETH contracts this week. This follows a Bloomberg report on August 17 indicating that the US SEC could allow the approval of ETH futures exchange-traded funds (ETFs) by this October. Open interest on CME’s ETH futures increased 10.8% between August 17 and August 23 to a notional value of $348M, closing the gap to the YTD average of $360M. This is compared to a 2.5% decline on non-US exchanges (excluding Coinbase) to $482M, though this figure is nevertheless above the YTD notional average of $452M. Note that open interest on traditional ETH futures traded on the Coinbase International Exchange climbed 77% over this same period, but the rising trend started well before Bloomberg’s announcement.

Month-to-date, open interest in CME’s ETH futures has increased 20% from the beginning of August, but this follows a 39% decline in July when market participants unwound their positions following the spike in June activity. Recall that open interest climbed by 71% in June and peaked at a notional value of $498M in mid-July following the filing of multiple bitcoin spot ETF applications by some large financial institutions. The move on many non-US derivative exchanges has been much less pronounced in recent months, albeit directionally similar.

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We believe these flows observed over the last week may be warranted, as the approval of an ETH futures ETF could yet be meaningful. When ProShares launched the first BTC futures ETF in October 2021, the fund accumulated $1.2B in assets in its first week of trading, according to data from Bloomberg. On the other hand, Ethereum fundamentals have been affected by the decline in the total value locked of the decentralized finance (DeFi) complex to $38B (based on data from DeFiLlama) following the Curve exploit earlier this month and more recently, a critical vulnerability on Balancer.

Crypto & Traditional Overview

(as of 4pm EDT, Aug 24)

Asset

Price

Mkt Cap

24 hour change

7 day change

BTC correlation

BTC

$26,068 

$507B

-1.36%

-0.01%

-

GBTC

$17.68

$12.24B

-2.8%

-4.6%

91%

ETH

$1,652

$198B

-1.58% 

-0.3%

92%

Gold (Spot)

$1,916

-

+0.07%

+1.45%

18%

S&P 500

4,376

-

-1.35%

+0.14%

42%

USDT

$1

$82.8B

-

-

-

USDC

$1

$26B

-

-

-

Coinbase Exchange & CES Insights

Renewed volatility has brought some participants back into the market. After last week’s sell off, BTC is now near the levels it traded at before the news of BTC spot ETF applications hit the tape in June. Some traders see this as an attractive entry point as the market’s probability of a positive decision in the Grayscale case hasn’t changed. No new news has come out, and the GBTC discount remains steady at approximately 26%.

Global ETH perpetual future open interest is now near the lowest levels it's seen in 12 months (see Market View). The token seems to lack a narrative to get traders excited. Surprisingly, even the news reported by Bloomberg that the SEC may be poised to approve an ether futures ETF wasn't able to provide a meaningful boost to the price. However, with positioning near the lows, it is worth watching as we think the right catalyst could yet spark a move in the token.

Screenshot 2023-08-24 at 9.11.40 PM

Financing Rates

8/24/2023

TradFi

CeFi

DeFi

Overnight

5.35%

5.00% - 10.75%

3.66%

USD - 1m

5.50%

5.25% - 11.00%

USD - 6m

5.80%

5.50% - 11.50%

BTC

2.00% - 6.00%

ETH

3.00% - 7.50%

1.37%

Notable Crypto News

Institutional

  • USDC launching on Polygon PoS, Base and Polkadot blockchain (The Block)
  • Nomura-Backed Crypto Custody Firm Komainu Wins Operating License in Dubai (Coindesk)

Regulation

  • Australia finds challenges, opportunities in central bank digital currency pilot (Ledger Insights)
  • SEC Expected to Approve Ethereum Futures ETFs by October (Decrypt)
  • 'Failure to State a Claim': Gemini Pushes to Get SEC Case Dismissed (Decrypt)

General

  • Friend.tech’s 24-hour fees climb to $1.4 million, ranking third after Ethereum and Lido (The Block)
  • Ether Staking Demand Remains Unfazed as EigenLayer 100K ETH Cap Limit Filled Within Hours (Coindesk)
  • Solana Pay integrates with Shopify for digital dollar currency payments (The block)

Coinbase

The Week Ahead

Aug 28

Aug 29

Aug 30

Aug 31

Sept 1

Notable Macro

China economic survey

US Consumer Confidence

US GDP ADP Employment

Eurozone Aggregate CPI

US Nonfarm Payrolls

US ISM

Notable Earnings

Argo Blockchain

Canaan Inc

Crypto

Ethereum All Core Devs Call

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