Bitfinex Alpha | Brace for More Volatility

Markets were left reeling last week as Bitcoin plunged below the psychologically significant $25,000 mark. This recent downward spiral was accompanied by a hair-raising $1 billion in futures liquidations.

Before this tumble, Bitcoin had been enjoying an almost serene market period, with historically low volatility levels, with bulls looking for the next catalyst to take the market higher. But the winds were changing. A spike in Open Interest in the futures market had signalled the turmoil, and by the time the storm passed, a staggering $3 billion in Open Interest had been obliterated.

Drivers included a combination of continued concern about continued high interest rates following the release of the July Fed minutes, bankruptcy at one of China’s largest property developers and reports of Bitcoin sales by SpaceX. Those concerns, combined with a highly leveraged market, provided a perfect storm.

Yet, while historical volatility rocketed, it was the surge in implied volatility – the market’s crystal ball – that raised eyebrows. This metric, still being higher than historical volatility, suggests traders are bracing for even more choppy waters ahead, hinting at potential seismic shifts in the cryptocurrency realm. The aftermath of this shakeout also reveals a rising trend in Bitcoin options open interest. This might be the market’s hedge against more chaos or a savvy bet on continued volatility. 

Parsing the Fed minutes, it is clear that policymakers are grappling with the decision to implement further rate hikes as they acknowledge the threat of resurgent inflation and all eyes are now on Fed Chair Jerome Powell’s upcoming Jackson Hole speech on the economic outlook. 

Economic data continues to be mixed. The retail sector displayed unexpected exuberance, registering a sturdy 0.7 percent growth in July, suggesting consumers are yet undaunted by inflation’s looming shadow. However, the housing arena offers a starker story; aspirations of homeownership are jeopardised by skyrocketing mortgages and spiralling prices, even as homebuilding surged 6.7 percent in July.

With builders slashing prices to attract potential buyers, the mortgage rate menace looms large. Manufacturing, another significant pillar, defied odds with a July rebound, especially in motor vehicles, surging 5.2 percent. Yet, the Leading Economic Indicator’s 16-month decline, paints a tableau of contrasts. 

In crypto news, London-based Jacobi Asset Management unveiled Europe’s first spot Bitcoin ETF on Euronext Amsterdam, leading ahead of the US, where similar efforts have met regulatory pushback. On the other side of the globe, the CME Group acknowledges Asia Pacific’s rising crypto clout. Joining forces with CF Benchmarks, they’re launching Bitcoin and Ether reference rates tailored for the region’s bustling trading hours. As crypto boundaries expand, institutional interest sharpens, heralding a transformative era in global finance. Meanwhile, Ripple Labs fiercely counters SEC’s bid for an early appeal in their unfolding legal drama. Stateside, Ripple argues the SEC’s appeal is both premature and unfounded.

We also take a deep dive into China and show how its economy is showing increasingly widening cracks. Beneath its powerhouse status lurk tales of a real estate debacle, as seen in real-estate giant Evergrande’s dramatic fall and threats of deflation in the economy. As factory prices plummet and Beijing navigates stormy waters with policy shifts, the world waits with bated breath. The dragon might be faltering, but it’s far from its final act. From business discussions to markets, everyone is closely watching China’s next steps.

Happy trading!

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