Major Setbacks in the Crypto Assets Industry and Market Response

After the most critical week of 2023, the digital asset space lost three important supporting institutions in the United States. However, investors seem more inclined to view Bitcoin and Ethereum as safe havens.

The speed and impact of developments over the past week have been astonishing. In just a few days, three major financial institutions in the United States announced liquidation or were taken over, all of which had provided services to digital asset companies.

A bank announced voluntary liquidation on March 8 and promised to fully refund deposits. The 16th largest bank in the United States was taken over by regulators on March 12, becoming the second largest bank failure in U.S. history. On the same day, another bank in New York also announced its closure.

It is expected that the deposits of these three institutions will be fully returned through reserves or government guarantees. Due to the business interactions between several large digital asset companies and stablecoin issuers with these banks, market fluctuations intensified over the weekend. In particular, a stablecoin issuer revealed that it held about $3.3 billion in cash at one of the banks, which temporarily caused the stablecoin to decouple from its $1 peg.

This article will focus on several key impacts of on-chain data and the broader market structure:

1. Multiple stablecoins have experienced decoupling phenomena, and Tether has regained dominance.

2. The overall digital asset market is experiencing capital outflows, mainly reflected in stablecoins, Bitcoin, and Ethereum.

3. Despite the increase in trading volume, futures open interest remains at a cyclical low. Speculative sentiment has driven Bitcoin to soar to $22,000, while Ethereum has rebounded to $1,600.

4. The price of Bitcoin fluctuates between several widely followed technical analysis models. In February, it encountered resistance around $25,000 near the 200-week and 365-day moving averages (, while this week it rebounded after touching around $19,800 near the 200-day and 111-day moving averages ).

It is worth noting that this is the first time in history that the Bitcoin trading price has fallen below the 200-week moving average, and the market is entering uncharted territory.

Since the collapse of a certain stablecoin project, this week has seen the first fluctuations in stablecoin prices, primarily stemming from concerns over the loss of support for a certain stablecoin. This stablecoin briefly fell to $0.88, followed closely by another stablecoin dropping to $0.89, which is approximately 65.7% backed by stablecoin collateral.

Other stablecoins are also slightly below the 1 dollar peg exchange rate, while some stablecoins are experiencing premium trading.

Ironically, as people worry that the heavily regulated U.S. banking industry may cause broader impacts, certain stablecoins are seen as a safe haven.

For a certain decentralized stablecoin, stablecoins have become its main form of collateral, a trend that has been growing since mid-2020. A certain stablecoin accounts for about 55.5% of the direct collateral and holds a significant share in various liquidity positions, totaling about 63% of all collateral.

This event has undoubtedly sparked discussions about the long-term implications of the decentralized stablecoin. However, this incident also revealed how the stablecoin's price is closely tied to the traditional banking system through a collateral mix that includes 12.4% tokenized real-world assets.

Since mid-2020, the market dominance of a certain stablecoin has been structurally declining. However, with recent regulatory measures targeting a certain stablecoin and concerns related to another stablecoin this week, the dominance of this stablecoin has rebounded to over 57.8%.

Since October 2022, a certain stablecoin has maintained a dominant position of 30% to 33%, but it remains to be seen whether the supply will decrease with the reopening of the redemption window. Another stablecoin has experienced a sharp decline in recent months, with the issuer halting new minting, and its dominance has dropped from 16.6% in November to the current 6.8%.

Capital Flow Analysis

Estimating the actual capital inflows and outflows in the digital asset market is quite challenging, but generally, initial funding mainly flows in through two major mainstream assets (Bitcoin and Ethereum) or stablecoins. Therefore, the realized market capitalization of Bitcoin and Ethereum, when combined with the circulating supply of major stablecoins, can provide a relatively reliable benchmark.

Currently, the total market value is approximately $677 billion, down about 20% from the historical high of $851 billion a year ago. Bitcoin accounts for 56.4%, Ethereum accounts for 24.5%, the three major stablecoins collectively account for 17.9%, and the remaining 1.2% is Litecoin.

According to the 30-day change calculation, February marked the first net inflow of funds since April 2022, peaking at an increase of $5.8 billion per month, mainly led by Bitcoin and Ethereum. However, last month the market saw a reversal outflow of $5.97 billion, with 80% coming from stablecoin redemptions (mainly from a certain stablecoin) and 20% from realized losses in Bitcoin and Ethereum.

As news of a certain bank's collapse spread, investors flocked to Bitcoin and Ethereum for refuge. Multiple trading platforms have experienced significant capital outflows, with approximately 0.144% of Bitcoin and 0.325% of Ethereum being withdrawn from the reserves of trading platforms, showing a self-custody reaction pattern similar to that after the FTX collapse.

In USD terms, the total value of Bitcoin and Ethereum that flowed out of trading platforms last month exceeded $1.8 billion. Although the relative scale is not too large, in the current stringent regulatory environment, the observation of net withdrawals from trading platforms indeed reflects the level of investor confidence and is worth noting.

On the other hand, the two main stablecoins see a net inflow of $1.8 billion to $2.3 billion into trading platforms each month. Notably, a certain stablecoin is flowing out of trading platforms at an astonishing rate of $6.8 billion per month, far offsetting this trend. Therefore, it is likely that a certain degree of "stablecoin conversion" is occurring.

Overall, this seems to reflect the market's response to stablecoins, Bitcoin, and Ethereum, highlighting people's clear preference for self-custody of trustless assets.

Futures Market Analysis

This week, the total amount of open contracts for the two major assets has dropped to a cyclical low point not seen in years. The notional value of Bitcoin futures positions is $7.75 billion, accounting for approximately 63% of the total open contracts.

In terms of futures trading volume, Bitcoin's dominance is similar, around 60%. After an event at a certain exchange and a period of silence at the end of the year, trading volume has rebounded. The total trading volume is about $58.2 billion per day, which is equivalent to the level for the entire year of 2022.

This week's price fluctuations are partly due to a series of long and short position squeezes. When it fell to $19,800, approximately $85 million in Bitcoin long positions were liquidated. Subsequently, as the price rebounded to above $22,000, about $19 million in short positions were liquidated.

Before this rebound, the funding rates in the perpetual swap market entered extreme spot premium levels. Traders paid annualized funding rates of -27.1% and -48.9% to short Bitcoin and Ethereum, respectively. The intensity of shorting Ethereum was also significantly greater, with the price spread of Bitcoin to Ethereum reaching 21.8%, the highest level since a certain exchange's sell-off.

This has intensified the liquidation in the Ethereum futures market. Over $48 million in short positions were liquidated when the market rebounded above $1,600, with the notional value of forced liquidations being 2.5 times higher compared to Bitcoin.

This indicates that the Ethereum market has recently been more used to express speculative intentions, which has intensified volatility.

Finally, we will compare the on-chain reactions of short-term holders with the reactions of the leveraged futures market. Based on a 155-day age threshold, almost all coins held short-term are likely to be profitable, except for those tokens acquired near local peaks. The expenditure profit margin of short-term holders (negative 1) has a return value of -3.8%, which indicates a relatively large realized loss, suggesting that the current "top buyers" dominate expenditures. The trend and performance of the expenditure profit margin for short-term holders are often related to funding rates. These two indicators reflect different but significant subsets of the Bitcoin market, one representing spot/on-chain and the other representing leveraged futures.

Against this backdrop, most of the tokens spent this week appear to be losses realized by local top buyers (other holders are relatively dormant). This occurred before a sharp spot premium entered the futures market, as traders opened speculative short positions.

As news of guaranteed bank deposits spreads, a strong rebound pushes Bitcoin above $22,000 and Ethereum above $1,600, catching most market participants off guard.

Summary

After the most influential week of 2023, the digital asset industry in the United States lost three important support institutions and found itself in an increasingly severe regulatory environment. With traditional financial markets closed over the weekend, some stablecoins deviated from their peg to 1 dollar, but recovered with the news of guaranteed deposits coming out on Sunday.

The reaction of investors is somewhat similar to the environment after an event at a certain exchange, with net transfers of stablecoins to the trading platform while self-custodying Bitcoin and Ethereum. However, from a broader perspective, the industry experienced a net capital outflow of about $5.9 billion last month.

The industry and even the global financial system are still in uncharted territory. This week has reinforced the intention to create trustless scarce digital assets in many ways.

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