TI Weekly Research:The Tsunami

TI Research

The "unprecedented" high volatility caused by the plummeted price on May 19 swept the entire crypto asset market like a tsunami. Although the prices of mainstream crypto assets have temporarily stabilized, the market value has shrunk to $1.62 trillion, which is far lower than the previous $2.3 trillion, and the current "stability" is only a combination of multi-party games. Under extremely high volatility, a large number of investors are waiting and watching, so that any turmoil will cause panic. Tracking policies and macro indicators has become the focus for investors recently, and the selling pressure brought by the striking of futures and options will also have an impact at the end of this week.
Year-to-date Ethereum market volatility, source: gvol.io

Mainstream cryptos: Bitcoin trading has fallen, while Ethereum has moved forward steadily

Last week, the price fluctuation of mainstream crypto assets was relatively limited, which seems to have stabilized. But in fact, this is only a kind of calm brought by the multi-party game. There are more and more bearing news from the East Asia markets: China and South Korea have increasingly strict regulations on crypto assets, and exchanges, miners, etc. have withdrawn one after another. Japan tends to be neutral and recognizes the value of stablecoins, but it also has increased attention to crypto asset speculation. The United States also maintains a neutral attitude towards crypto asset-related regulation, and the FED has not released a clear signal to strengthen regulation of the crypto asset market. The long and short counteract with each other, which makes the spot trading volume drop to the level before the volatility jumps after it experienced a panic rise.

Bitcoin trading volume changes in the past 30 days, as of 2:30am on May 28, source: tokeninsight.com

From the perspective of contract trading volume, the exchange's restrictions on contract trading in mainland China have had a significant impact: after May 20, the trading volume of Bitcoin contracts has dropped significantly compared to before. Bitcoin contract trading volume this week was $580.5 B, slightly higher than in early May, but the recent daily trading volume has fallen back to the level of April. Generally speaking, the contract trading volume is positively correlated with the volatility of the market, and the contract trading volume will increase when the volatility is high. However, as China's supervision has led to restrictions on contract trading, there has been a significant deviation between contract volume and volatility. From the historical volatility chart, it can be found that after the regulatory event, affected by trading restrictions and panic, the volatility of spot index prices has been decoupled from the volatility of contract prices.

Historical volatility of Bitcoin perpetual contract and spot index prices in the past 30 days, source: gvol.io

Another noteworthy change is that Ethereum's spot trading volume has continuously surpassed that of Bitcoin. Due to the deficient buying orders and continued decline in marginal revenue of Bitcoin, Ethereum's continued high marginal revenue is being favored by investors -- even though its market value only accounts for 18.5% of the entire market, which is much lower than Bitcoin's 43%.

Ethereum price changes in the past 30 days, source: tokeninsight.com

This week, Ethereum's trading volume reached $130 B, while Bitcoin's trading volume was only $115.6 B. As for the fund flow in the past 30 days, EU/NA investors and investors with large positions have increased their holdings of Bitcoin more obviously, while small investors have chosen to increase their positions of ETH, and no matter in Asia, Europe, and America, the position increasing of ETH is higher than that of Bitcoin.

Funds flow in the Bitcoin market of major exchanges in the past 30 days, source: tokeninsight.com
Funds flow in the Ethereum market of major exchanges in the past 30 days, source: tokeninsight.com

In the tsunami: how to deal with uncertainty?

With the soaring market volatility, the increase in uncertainty brings higher risks to investment. Although we don’t know when volatility will be back to normal levels, there are a few clear conclusions that seem to be applicable to recent investments:

  • With high volatility levels above 300, NEVER consider the leveraged trading or derivative products' trading.
  • The timing of bargain-hunting may come soon, but it is difficult to determine.

On the one hand, affected by supervision and emergencies, the entire market is in a frayed nerve. Any information, even false or exaggerated one, will cause obvious price fluctuations; and the selling pressure caused by the monthly delivery of options and futures at the end of the month will also have an impact on asset prices. Large price fluctuations are the enemy of perpetual contract traders: neither long nor short will benefit from it. According to the liquidation data, the ratio of short-term and long-term contract liquidation has been close to 1:1, indicating that it is difficult to obtain ideal returns whether it is long or short, and the risks to be assumed are relatively high.

Liquidation of perpetual contracts in the past 30 days, source: bybt.com

On the other hand, it is difficult for the volatility to drop to an appropriate level of entry before the supervision and macro-market information is implemented. At present, China's specific regulatory measures for the crypto asset market have not yet been clarified, while the US economic stimulus plan is still under discussion, and the expected quantitative easing has not yet been fully clarified. In this situation, institutions have lowered their expectations for Bitcoin, and it is expected that the price of Bitcoin will continue to fluctuate at the current level under high volatility; due to its market share, Bitcoin's fluctuation will influence the entire market. The good news is that the overall market volatility has begun to show a downward trend, while it is still far from the threshold of entry risk that ordinary investors can bear. Next week may be an opportunity for risk-seekers to make bargain-hunting; but in any case, please do a good job of risk control.

Bitcoin market volatility in the past 30 days, as of 4:00am on May 21, source: gvol.io




TI Research

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