TI Weekly Research: Regulation, Recovery and Expectation Adjustments

Mainstream Cryptos: "Not Surprised"

The delivery of derivatives caused the price of Bitcoin to plummet to below $31,000. With the completion of the derivatives delivery, the price of cryptos rebounded significantly this week, rising to a maximum of over $36,000. Everything is not unexpected: the completion of large-scale delivery of derivatives is often accompanied by a rebound in asset prices. For most of this week, the price of Bitcoin has stabilized at around $33,000, and there has been no significant upward or downward fluctuations.

Bitcoin price changes in the past 7 days, as of 4:00 am July 2 , source: tokeninsight.com

The weakening of speculative sentiment may be the reason for the smaller recent price changes. The market volatility rose to a peak after the derivatives delivery date, and then the uptrend stagnated and turned to decline. Spot and derivatives transactions also declined significantly compared to last week: Bitcoin perpetual contract trading volume fell to $536.1B this week, and the volume of ETH perpetual contract fell to $174.8B. After a tense "Great Delivery Day", investors are recuperating.

Bitcoin and Ethereum perpetual contract trading volume in the past 30 days, as of 4:00am on July 2, source: tokeninsight.com

However, the undercurrent in the market has not stopped. As of Friday, the lending rate for mainstream cryptos on the Bitfinex exchange continued to be higher than the 30-day average lending rate, indicating that some people seem to be lending a large amount of mainstream cryptos recently. At the same time, the futures market has seen a significant negative basis. In the Deribit exchange where institutional investors are concentrated, the basis of the Bitcoin contract delivered on Jun 9 has reached a staggering -11.38%, and the front month Ethereum futures is about -12%. Considering that the holding cost of cryptos is negligible, the extremely high negative premium of futures shows the market's significant pessimistic expectations.

The performance of recent unexpired futures, as of 4:30am on July 2, source: metrics.deribit.com

Frequent regulatory actions are an important reason for investors' concerns. In terms of transaction, Binance was investigated and warned by financial institutions in Canada, the United Kingdom, the Cayman Islands and other places this week, and Singapore also announced that it would investigate Binance "as appropriate". Moreover, South African and British financial institutions have expressed concern about fraud involving the crypto market. Many British banks have followed the existing precedents and imposed restrictions and freezes on some accounts involving crypto transactions. In addition, the high-profile entry of short positions in traditional markets such as Soros has aroused the vigilance of many investors: given the scale of existing cryptos, large short positions are already enough to cause major losses.

In this context, investors have generally adjusted their expectations for mainstream cryptos. The flattening and downward adjustment of implied volatility indicates that investors have no expectations for a significant price recovery in the short term. However, from the perspective of skewness, investors still have enough confidence in future price restoration, especially for Ethereum.

Bitcoin volatility changes in the past 30 days，Source：gvol.io

Changes in the skewness of Ethereum options on different expiry dates in the past 30 days, source:gvol.io

Mining: "A Surprise"

Due to regulatory reasons, the hash rate of mainstream cryptos dropped sharply from May to June. But for the mining industry this week, things seem to have come to an end: as miners poured into Central Asia, North America and other regions to re-deploy mining machines into production, the hash rate of mainstream cryptos has begun to pick up. As of 17:00 on Friday afternoon, Bitcoin's hash rate has recovered to around 90 EH/s, while ETH's hash rate has recovered to around 490TH/s, showing signs of recovery to a certain extent throughout the network.

Changes in Bitcoin's hash rate in the past year, source: BitInfoCharts

The advancement of mining compliance in North America, Iran, and Kazakhstan has also strengthened the confidence of miners to a certain extent. Iran issued licenses to 30 crypto mining companies, exempting the "summer shutdown order"; Kazakhstan announced that it would impose an electricity surcharge on miners. Although licenses and surcharges have increased mining costs to a certain extent, it means that relevant companies have been regarded as compliant operating entities, which is positive in the long run. According to past data, the recovery of hash rate is often the first step in market recovery. If everything goes well, it is expected that hash rate will return to normal levels in September-as the foundation of the crypto market, there is no doubt that the good news from the mining industry is an important source of confidence for investors. However, as the hash rate will not recover significantly in the short term, market uncertainty is still at a high level under the current low market expectations.

Conclusion：

July will be an important threshold for the adjustment of the crypto market's expectations. After the delivery of derivatives, a large number of uncertain factors have been incorporated into the pricing: whether the recovery progress of hash rate, or the supervision and compliance process, even the Ethereum upgrade "London", the comparison of sentiment and strength between the long and short, these impact will be magnified at the moment, which will has a significant impact on asset prices in the entire market. Taking into account the increase in uncertain risks, risk control will be the core theme of the market recovery period, and the movements of regulators and short-term parties are the two areas that require the most attention in the near future.