A monthly review of what’s happening in the crypto markets enriched with institutional research on key industry topics in collaboration with Swiss digital asset specialist, 21Shares AG.
Tesla Added $1.5 billion worth of Bitcoin to its Balance Sheet
Bitcoin jumped to a record price of over $48,000 as Tesla invested $1.5 billion as stated in the
Form 10-K – an annual report required by the U.S. Securities and Exchange Commission (SEC) that gives a comprehensive summary of a company’s financial performance submitted by Tesla:
“As part of the policy, which was duly approved by the Audit Committee of our Board of Directors, we may invest a portion of such cash in certain alternative reserve assets including digital assets, gold bullion, gold exchange-traded funds and other assets as specified in the future. Thereafter, we invested an aggregate $1.50 billion in bitcoin under this policy and may acquire and hold digital assets from time to time or long-term. Moreover, we expect to begin accepting bitcoin as a form of payment for our products in the near future, subject to applicable laws and initially on a limited basis, which we may or may not liquidate upon receipt.”
The news drove to the largest candle in Bitcoin history of $8,871, with the price rising from $38,058 to $46,929 – almost 10 years after Bitcoin traded for the first time over $1 on February 9, 2011.
The rise of Bitcoin’s price also led to large short liquidations for traders betting on the fall of the cryptoasset. For example, $57 million shorts were liquidated on the Malta-based cryptocurrency exchange, OKEx.
We believe there’s a significant amount of room for growth. Indeed, given the fact that the proportion of investment portfolios invested in cryptoassets for high net worth individuals worth over $30 million represents only 1% according to the Wealth Report Attitudes survey. This figure is a testament to the fact that we are still early innings in the adoption cycle of Bitcoin and the rest of the crypto market with a 100 million user base, which accounts for less than 3% of the Internet population of over 4 billion people.
At 21Shares, we expect continued corporate and institutional Bitcoin adoption going forward, as stated in our year-end review, which will eventually reflect in the price appreciation of Bitcoin that could reach over $100,000 per coin if this bull market behaves like previous ones (in the chart below, the red dot is where we are at the moment). In fact, given the level of adoption of the crypto asset, with its historically reputational damage for illicit use cases that account for less than 0.4% now, we believe we have entered in a new adoption era for the crypto market to reach over 1 billion users.
For instance, the Federal Reserve of St Louis published a paper on Decentralized Finance stating that DeFi may potentially contribute to a more robust and transparent financial infrastructure. In the same vein and quite in a novel way, Miami is considering giving city employees the opportunity to get their salaries paid in bitcoin alongside paying their local fees and taxes. Finally, the city’s treasury might place some of its investment capital into bitcoin, which would be a first for major cities in the United States and perhaps in the world.
The Second Major Crypto Correction
The most pressing question from investors within the Bitcoin and cryptoasset market lately has been: What caused the recent downturn in markets? The chart below shows the performance of the five largest cryptoassets by market value and an index of DeFi tokens.
As we can see, the best-performing asset of the group, Bitcoin, has still declined more than 15% in 24h – with other assets such as BNB declining as much as 21% after its drastic run-up over the last few weeks. The cause behind this downturn and correction was not because of a change in the fundamentals of cryptoassets, but rather an inevitable correction given how overleveraged the market has become and issues with market microstructure of crypto-native exchanges such as Kraken and derivative exchanges such as Binance futures.
This correction was not driven simply by spot selling but rather by initial sell orders being exacerbated by a cascade of liquidations from overleveraged traders – who often have access to up to 101x leverage on an asset class whose most mature asset, Bitcoin, still averages daily volatility of above 3%.
There were over $5B worth of long liquidations in a few days as traders were margin called on derivative exchanges as a result of the crash. Due to the use of auto-deleveraging technology on crypto exchanges where identity-based recourse measures are difficult, margin calls and the subsequent sales of the traders’ positions can then in fact exacerbate market downturns – as was the case lately. This situation has occurred on occasions before over the last year, most noticeably on March 12 where Bitcoin’s price was nearly halved in response to liquidity and deleveraging issues on the then leading derivatives exchange, BitMEX. These days, however, exchanges such as Binance Futures has overtaken BitMEX as the leading derivatives exchanges both in volume and open interest.
Such issues associated with leverage are likely to persist, but decrease overtime, as more institutional infrastructure enters the market which claws back on the amount of leverage users can take and reduce the influence of current unregulated derivative exchanges in the market – replacing them with institutional products such as 21Shares’ ETP suite and futures exchanges such as CME’s. In addition, during such events the limits of prominent exchanges, such as Coinbase and Kraken, which often go down during periods of volatility is brought to forefront of the market.
While we know that, as the market continues to develop, issues caused by excessive leverage in the market will decrease but in the meantime there are two key metrics that investors should keep an eye on to attempt to predict future events such as this: funding rates and open interest. We will be going into further detail about these two metrics and how they can be used to judge the market cycle in our upcoming webinar with SwissQuote.
Needless to say, the massive decrease in market-wide open interest over the past two days is indicative of how much leverage has been flushed out of the system.
In the absence of large institutional spot buying, March will likely be a period of consolidation for Bitcoin as the crash reduces market confidence and its propensity to overleverage itself. Given the amount of spot buying that has occurred up until the $45K mark for Bitcoin, it is unlikely that this phenomenon in-of-itself will lead to a total capitulation.
In fact, the recent news of Bitfinex and Tether’s settlement with the New York Attorney General’s (NYAG) office will remove the market’s largest potential black swan risk of legal action against the leading stablecoin and will likely revert some of the recent negative action.