The end of Bitcoin's magic? Traditional financial institutions step into the cryptocurrency space

FTX数字资产衍生品交易平台

特邀专栏作者

2020-12-18 03:25

This article is about 4725 words, reading the full article takes about 7 minutes

Ahead of the Bitcoin and cryptocurrency world, there seems to be a dual development path...

write@SplitCapitalwrite

When Bitcoin is mentioned, the first thing that comes to mind is volatility.

Well, maybe not, maybe the first thought was "what the hell is this magical internet currency?" The most rumored thing about Bitcoin is its relatively small market cap and huge volatility. ability to earn.

Huge swings and the myth of fabulous, seemingly within reach, lure amateur traders around the world to join the biggest frenzy in financial markets. For them, volatility represents value. For experienced Bitcoin skeptics, huge volatility has always been the number one weakness in their crusade against Bitcoin.

Of course, a lot more can be said about the volatility of an asset with a market capitalization of about $250 billion, but we can probably save that for another time. Right now, Bitcoin is pretty much synonymous with capricious volatility... or at least that's all we know about Bitcoin so far?

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Source: Skew.com

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1. Introduction: BitMEX - The End of Bitcoin Magic

First, let me share a story with you.

In the "Lord of the Rings" trilogy, the heroes (humans, hobbits, and some elves) are tasked with protecting their kind from an increasingly powerful evil that is approaching them. The evil forces intend to use the power of the "Lord of the Rings" to restore their position in Middle-earth. In a fierce battle between good and evil (spoiler alert!), good wins and the "Lord of the Rings" is destroyed.

This trilogy is often regarded as one of the greatest works of modern literature and the origin of many adventures derived from it. But there's a part of it that's always baffled me...why only some elves help? Instead of all the elves coming to help?

First a small digression. In 2017, when everyone was talking about Bitcoin, a relatively small derivatives platform took the main stage. By the time Bitcoin entered the bubble burst stage, that small platform BitMEX had become the king of cryptocurrency exchanges. .

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Figure 1: May 2017: 20,000 BTC → September 2018: 180,000 BTC

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2. The reverse "Robin Hood" effect

If you look at the All Exchange Inflows data, you will find that when the price of Bitcoin is around 6,000 and 10,000, the inflow of Bitcoin will increase sharply. Currently, inflows to all exchanges remain low, meaning users are not selling bitcoins held in personal wallets.

In addition to the “reverse Robin Hood effect,” BitMEX has also seen a flood of proprietary trading platforms enter the space in search of spread betting and market-making strategies optimized in inefficient order books.

It was very common in the past for the funding rate of perpetual contracts to exceed 5 basis points every 8 hours, but now it rarely breaks through 1 basis point. Market makers have taken control of the market, tightening spreads to practically negligible levels, further dampening volatility (and adding "and providing traders with more efficient pricing" here, so it's not all bad.)

One of the most unique features of crypto-native derivatives exchanges is the use of Bitcoin as collateral, which is one of the biggest reasons for their price volatility.

We’ve taken this for granted for the industry at the moment, but the math behind inverse perpetual contracts adds to Bitcoin’s volatility. As mentioned by many others, and as recently mentioned by Nibbio quant trader Clarens Caraccio in the June FTX Digest, overall delta (net exposure) varies with Bitcoin price. Using the example from Clarens’ article, we can see the different reactions to 1 BTC vs $10,000 across various price ranges.

During times of selling and higher uncertainty, the delta of long positions on BitMEX has fallen faster, meaning traders need to post more collateral to maintain their previous leverage ratios or face higher liquidations risk, thereby exacerbating volatility.

The big waterfall brought about by the liquidation of BitMEX on March 12 this year clearly demonstrated this phenomenon. The overall price of Bitcoin fell from $9,000 to $3,600 in 48 hours, and nearly $1.7 billion in Bitcoin was liquidated on BitMEX, which made the price of Bitcoin on BitMEX lower than that of almost every other exchange.

At the time, Bitcoin’s 1-month realized volatility had soared to nearly 200%, while its 1-month implied volatility was as high as 180%. In the ensuing months, Bitcoin’s volatility has dropped significantly by this point, as traders began withdrawing funds from BitMEX and spot demand outpaced derivatives price demand.

Following the bitcoin price crash, BitMEX’s market dominance declined sharply as various cryptocurrencies began to enter spot trading and other derivatives exchanges. BitMEX’s market share dropped by nearly 33% as traders found other new products to trade with USDT and in DeFi.

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3. Decentralized finance (DeFi) erodes centralized financial territory (CeFi)

When I first heard this sentence from Arthur Cheong of Defiance Capital (DeFi eating CeFi, decentralized finance erodes centralized financial territory), I had no idea what DeFi was, and I didn’t know who would go to it. Use this thing.

In 2017, if you have any understanding of DeFi, you are limited to IDEX and EtherDelta, and at most it is a rough and usable UI. However, in 2020, DeFi has achieved a complete rebirth through various projects and protocols that have retained huge value.

As it stands, the total value locked (TVL) of DeFi projects exceeds $12 billion, and that’s almost 20 times its value in the previous year.

The focus of our discussion here is not DeFi, nor is it to discuss the future prospects of DeFi, whether it can develop and grow (although the development prospects of DeFi are indeed good), but the impact of DeFi on Bitcoin volatility.

After the March 12 crash, some market speculators seem to have found a new way to speculate on the future of cryptocurrencies. The total value locked in the DeFi market is 12 billion US dollars, which not only shows DeFi's ability to capture attention (attracting attention from BTC derivatives transactions), but also represents that it may have attracted funds to enter the Bitcoin market.

As far as Wrapped Bitcoin (WBTC, the ERC-20 token anchored to Bitcoin on Ethereum, issued according to the ratio of 1 WBTC = 1 BTC), the total value has exceeded 1 billion US dollars, further expanding the Bitcoin derivatives market transaction volume.

DeFi also paved the way for holding cryptocurrencies for income. Through yield farming or liquidity providing, users can generate real income through Bitcoin or other assets.

This isn’t necessarily new either, as BlockFi and other lending sectors have created yield-enhancing cryptocurrency products that dampen the volatility of those cryptocurrencies. However, the essential difference between liquidity mining and these products is that liquidity mining can obtain on-chain income at any time without the need for central authorization.

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4. End of Bitcoin magic?

No matter how brilliant it was, everything will eventually come to an end. Following the preliminary investigation of BitMEX by relevant departments in the summer of 2019, the government finally made formal charges against BitMEX this year, and a large amount of Bitcoin flowed out of the BitMEX exchange. Under the previous system, this incident should have caused violent fluctuations in the price of Bitcoin, but now that BitMEX’s market advantage has disappeared, such news did not bring any waves to the market.

4.1 Introduction: Elves

We later found out that in the Lord of the Rings trilogy, the reason the elves were so unwilling to help the forces of good in the fight against evil was because most of their power and lands were protected and controlled by the Lord of the Rings.

Destruction of the Ring meant the destruction of their own civilization, and therefore the end of their rule in Middle-earth. With the same considerations, market participants are less willing to forego the benefits of cryptocurrency-native derivatives exchanges, as these platforms have been the main source of their most important earnings.

At the end of the trilogy, the elves sailed into the depths of the sea to the "Land of the Immortals," where they chose immortality. At this moment, we also find ourselves at the end of an era — the end of the magic era of Bitcoin.

4.2 Traditional financial institutions set foot in the field of cryptocurrency!

With these allegations against cryptocurrency exchanges, increased regulation, a crackdown on exchanges and possible further taxation of cryptocurrencies, it has been difficult for cryptocurrency market participants to maintain their long-term bullishness on the cryptocurrency market. .

However, it is these measures that pave the way for a new group of investors. 2017 (the "make crypto more mainstream" part) looks pretty naive as banks, investment managers, business leaders, central bankers and politicians all take a keen interest in Bitcoin and other cryptocurrencies Expectations have become commonplace these days.

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Source: Skew.com

During the most turbulent financial period in recent history, Bitcoin instantly transformed itself into a favorite among the crowd. Financial firms such as JPMorgan, Goldman Sachs, Fidelity and DBS have added bitcoin to their watchlists conducting institutional research and further developing custody and other potential products for clients.

4.3 Two forked roads

It is obvious that Bitcoin is being accepted by more and more institutions. However, with this trend coming, its magic for investors may also be coming to an end. As things stand, the spot market has completely dominated Bitcoin's forward price discovery.

Projects like Serum and Synthetix offer users the ability to transact instantly on-chain through marketplaces like in the past. These projects will allow users to conduct collateral-free transactions at any point of the day and, in some cases, earn without selling their cryptocurrencies.

Although such projects are still in their early stages and there is still a lot of room for development, they are progressing rapidly, and I believe that decentralized derivatives exchanges have ushered in a new era of magic in the cryptocurrency trading market.

In the end, what lies ahead of the world of Bitcoin and cryptocurrencies seems to be a dual development path—one is a world of strictly regulated and compliant institutional investors, and the other is a completely decentralized DeFi exchange. world.

If you have any questions about cryptocurrencies or the blockchain ecosystem and want to be answered, you can send your questions to us by email: research@ftx.com. We'll take some representative questions and answer them specifically in next month's digest.

Read the original text:https://blog.ftx.com/monthly-digest/ftx-october-digest.pdf

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