Sygnum Market View – 5 June 2020
Federal Reserve measures are the new fundamentals for traditional markets
Bitcoin price surges past USD 10,000 mark only to drop shortly after, driven by overleveraged derivatives trading
Bullish outlook for Bitcoin remains
Traditional Markets: Federal Reserve measures as the new fundamental
The current unrest in the US has had little effect on stock markets. Last week, the S&P 500 closed above 3,000 for the first time since March, and the rise continued this week as lockdown restrictions ease globally. Since the Federal Reserve announced its extensive stimulus and relief measures – increasing its liabilities from USD 4 trillion to USD 7 trillion[1] – US stocks have gained nearly 40 percent. The S&P 500 is currently down only 5.4 percent year-to-date. It appears that commitment from governments and central banks to support the economy overshadows macroeconomic and corporate indicators – leading to a disconnect between markets and the economy.
Bitcoin ping pongs around the USD 10,000 mark, driven by overleveraged derivatives market
Meanwhile, the crypto market is going through its own exciting times. Overnight from Monday to Tuesday, Bitcoin jumped 9 percent in a short time, tackling the USD 10,000 mark for the fourth time this year. After moving within a tight range of USD 10,000 to 10,100, it suffered a drop of 8 percent in less than five minutes.
Both moves can be partially explained by liquidations on the derivatives exchange BitMEX.
>> Mon/Tue Overnight Push
During the overnight push from Monday to Tuesday, extremely high funding levels on perpetual swaps were seen at several exchanges. The push upwards was fuelled by short squeezes leading to buy liquidations of USD 131 million on BitMEX. With BitMEX’ size and its 100x leverage offering, it was a move on steroids.
>> Tuesday Price Drop (16:45 CET)
With extremely high levels of leveraged long positions, there was ample liquidity for short whale orders, which in turn wiped out several longs within a few minutes. Sell liquidations spiked up to USD 111 million on BitMEX.
The significant liquidations on BitMEX also affected their quoting prices. While the low ranged from USD 9,135 to USD 9,318 on other exchanges such as Okex, Bitstamp, Bybit etc., prices on BitMEX slipped to a session low of USD 8,600.
Too much power in the hands of offshore exchanges
The recent price swing raises criticism around BitMEX and offshore exchanges in general. The influence of the derivatives market on price is increasing and these exchanges offer high amounts of leverage. In addition, their role as trading venue, clearer, and custodian places a large amount of power into their (mostly unregulated) hands. System outages are not uncommon during volatile periods. These factors together could present a hurdle to developing a trusted, secure and efficient ecosystem.
We believe that a concerted and deliberate effort to reduce leverage is needed from the largest venues, so as to create a more stable and sustainable market. A regulated derivatives offering could also help to establish reliable standards and risk management in this space.
Bullish outlook for Bitcoin remains
The overall bullish outlook for Bitcoin remains. Futures are still trading in contango, prices are well supported around USD 7,700 – 8,300, and the drop did not break the overall mid-term bullish trend. As the valve has been opened and (derivatives driven) pressure reduced, there is the chance for a sustainable break of the USD 10’000 resistance, preferably driven by physical buying rather than overleveraged derivatives.
[1] https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm