MVC July 2023 Report: The Movement Against the Way

Market Overview and Industry Trends

Since the last monthly report where we were bearish on the short-term market, BTC oscillated and retraced to around 24,400. Just as we were pleased that we could start building positions at the expected price of 22,000, the US market suddenly saw a series of unexpectedly positive news, such as the legal dispute with BN.US, BlackRock's Bitcoin futures, and the EDX compliant exchange. Boosted by this news, Bitcoin quickly rose to the 31,000+ level and remained volatile at this price for almost half a month.

From a micro perspective, this uptrend is still a short-term trend primarily driven by buying pressure in the US spot market, and it has several characteristics:

• Coinbase BTC has a larger spot trading volume than Binance (and we can now determine that the main buyers were probably MicroStrategy and Celsius, exchanging small coins for BTC). Moreover, the increase in futures positions lags behind the spot price. The spot trading volume already surged on the evening of the 20th Beijing time, but the futures open interest increased significantly on the 21st;

• The first chart below shows the overall BTC futures open interest in the entire market, and the second chart shows the Binance futures open interest. We can see that Binance's futures open interest has just reached the peak level in mid-April this year, while the overall market's futures open interest far exceeds the level in April. The main contributor is actually CME, with a $1 billion increase in open interest. Although Bitfinex has a small proportion of open interest, it has seen an increase of nearly 60% compared to April. It seems that the bullish sentiment among the American people is indeed very high recently;

• BTC Dominance further increased from 47% to 52%, and the speculation on small and medium-sized tokens has completely declined. In terms of on-chain dex, gas levels and fund activity have been consistently low before the hot trend of azuki/meme 2.0. Besides BTC, the overall market is in a sluggish state.

During the rise of BTC, BCH is the most positively affected variety and also the most emotionally intense currency recently. As catalyzed by the information from the EDX compliant exchange, BCH price increased from around $110 to a high of $300. The total open position on the market reached as high as $500 million, slightly surpassing the historical peak in May 2021, demonstrating the intense enthusiasm.

Reviewing the trajectory of BCH's rise this time, there was a large amount of spot buying of BCH on the 21st day. However, it was not until the 24th day that there was a significant increase in open positions, accompanied by a significant negative fee rate. The daily trading volume of BCH/KRW on the Korean exchange Upbit reached $550 million, which is 3.5 times the trading volume of BTC on the same exchange. The rise of BCH almost replicated the path of Aptos in January of this year, where aggressive short sellers of the contract were caught off guard by the passionate traders in Korea.

Interestingly, APT also touched the price peak when the contract position reached a peak of $500 million. The peak market value of APT was approximately $3 billion. Currently, the circulating market value of BCH is around $5 billion, indicating that BCH still has potential for leverage. However, considering the relatively weak market liquidity, BCH's open interest has already decreased by about 22%, and the Korean spot market has already shown signs of overheating and peaking. In the future, BCH will likely replicate the process of slow decline and continuous decrease in open interest, similar to APT. After all, BCH miners will not miss the hedging window of such an annual event.

In addition to BCH, DeFi blue chips represented by Aave and RWA, led by Comp/MKR, have attracted market attention again. As mentioned in our monthly report last month, the fundamentals of these DeFi blue chips have significantly improved in the past period, and all these tokens experienced a significant volume surge on June 25th. According to the monitoring of the team's data group, on June 25th alone, an address withdrew more than $8 million worth of Aave from Binance. The purchase volume of this single account reached 10%+ of Aave's daily trading volume. The address also bought nearly $8 million worth of MKR and $1 million worth of Comp, showing strong support for DeFi blue chips. The founder of Compound announced the establishment of the RWA new project on June 29th, which coincided with the timing, and now the address has started selling the previously bought DeFi blue chips.

The fundamentals of DeFi blue chips have always been solid, there is no doubt about that. Currently, apart from MKR, RWA narrative has no real use case, and the sustainability of the theme is questionable. Considering that the whales that ignited the market have started selling, and the liquidity required for these elephants to dance is quite high, we have sufficient time window to observe whether the market will continue.

However, the revival of DeFi blue chips is enough to alert us that buying pressure of around 10 million can already move the price fluctuations of billion circulating supply projects, and the market's chip structure is shifting from dispersion to concentration, "the pie is getting lighter".

Some early adopters are starting to bet on their aesthetics and value preferences, and the selling pressure of individual tokens is significantly weakening. According to our preliminary research on 109 core targets, most of the projects launched in the second half of 2021 will complete full unlocking between August and November of this year, and private investors are generally selling to take profit. Retail investors have a very low position ratio, so many small-cap tokens with growth potential may no longer have a significant selling pressure in the next two months. At the same time, due to relatively thin market liquidity, marginal capital inflows will create significant fluctuations, providing an excellent opportunity to bet on small coins.

In terms of industry trends, we are beginning to perceive the initial form of the Onchain Game ecosystem in the application layer. The trend of the Mud & Dojo vs Rollup application chain three-party competition is gradually becoming clear. It is expected that with the launch of starknet's mainnet, the onchain game will usher in the first wave of enthusiasm.

Regarding the specific timing of establishing positions, we need to refer back to the analysis of BTC's price movement itself.

The only main line that affects the recent BTC market is the progress of the approval for BTC ETFs from institutions such as BlackRock. However, the results of the approval progress are completely unpredictable. Once approved, it is reasonable for BTC to surge to $40,000 with positive stimulation. If the approval is delayed, the market will need to engage in self-emotional speculation. This situation is somewhat passive for funds that have just been established at this moment.

From the market speculation in the recent vacuum of news, we can see that some retail investors who follow the trend are being repeatedly worn down. Every time BTC rises to around $31,500, the open interest (OI) increases, but it will immediately fall with the stop loss, wearing down the market within a range of about 5% for nearly three weeks.

From the data of BTC OI in the above chart, we can find that if we only observe the contract positions on Binance, on June 23rd, Binance's BTC OI reached as high as $4.57 billion, which is consistent with the level on April 12th of this year (April 12th was the first time BTC attempted to break through $31,500 this year), and is similar to the level in March 2022, indicating that the greed sentiment on the exchange has reached an extreme. However, the stablecoin market value continuously reduced by $4.4 billion from April 12th to the date of this report, resulting in a tighter liquidity on the exchange.

Therefore, we have reason to believe that under the unexpectedly positive stimulation from BlackRock, the sentiment for long positions on the exchange is intense, and all leverage positions have been maxed out. The current market liquidity can only support a leverage scale of about $4.5 billion on Binance, and it will be difficult to have any further new funds opening positions in the future.

In the case of meeting the above conditions, we can consider building positions and pay close attention to market changes. Due to the high volatility of the cryptocurrency market, please invest carefully and make decisions under the advice of professionals.

Establishing a position: In addition to seizing the precious opportunity of market downturn, we also conduct intensive due diligence and BD work on the targets in the planned portfolio. The objective is to utilize the fund's ecosystem resources to acquire chips at a price lower than market trading price through OTC.

The reversal of movement, simply understood as the meaning of "extremes beget reversals", is now approaching, whether in the short or long term.