Bitcoin and Nasdaq correlation hits all-time high

• Price volatility: The sale of Yuga Labs virtual land crippled the Ethereum blockchain, causing the price of ApeCoin to spike and then plummet.

• Market Liquidity: Turkish lira crypto asset trading volumes surge to yearly highs as inflation soars.

• Derivatives: Funding rates rose amid last Thursday’s spot sell-off.

• Macro Trends: Bitcoin is almost as correlated with the Nasdaq tech index as it is with Ethereum.

Hot Topics of the Week

TerraUSD is decoupled from the U.S. dollar, and the risks of algorithmic stablecoins are prominent.

Figure: UST-USD and UST-USDT prices

Data source: Kaiko 15-minute moving average asset price

The TerraUST stablecoin reportedly decoupled from the US dollar over the weekend after millions of UST sales generated strong selling pressure. Most of the UST sales were conducted on stablecoin-centric distributed and centralized exchanges. The above chart shows the price of UST against USD and USDT USD, which aggregates the prices of all UST currency pairs across all centralized exchanges and decentralized funding platforms.

Around 11pm on May 7, UST traded as low as 0.988 to the dollar. UST-USDT daily trading volume also surged, reaching an all-time high of over $1 billion, with trading platforms reportedly forced to temporarily halt UST trading. Last month, UST became the third-largest stablecoin with a value of around $18 billion, surpassing Binance’s BUSD. However, the huge growth in its trading volume was mainly driven by Anchor, the Terra ecosystem’s lending protocol, which offers users attractive double-digit yields, which also calls into question the sustainability of this model.

Price volatility

Bitcoin trading at 10-month low

As of Monday morning, Bitcoin was at a 10-month low , the latest sign that “macro headwinds” and the Fed’s hawkish policies could continue to weigh on risk assets in the near term. Equity markets weren’t faring much better, with the Nasdaq Composite posting its biggest one-day drop since 2020 and its correlation with Bitcoin reaching an all-time high. Despite the overall bearish outlook, Binance had a good week. The trading platform received regulatory approval to operate in France, contributed $500 million to Elon Musk’s Twitter takeover offer, and listed the BUSD stablecoin on its competitor Coinbase.

ApeCoin plummets, Ethereum is congested

Figure: ApeCoin price and funding rate

Data source: Kaiko derivatives data

Yuga Labs, the company behind the NFT series Bored Ape Yacht Club, entered the metaverse industry last week with a much-anticipated virtual land sale for its upcoming Otherside Metaverse platform. A record $561 million in virtual “parcels” paid for using the associated token ApeCoin (APE) were sold in just 24 hours, with a “pump and dump” phenomenon that saw the value of APE soar to an all-time high before the token factory and then fall by more than 50%. Funding rates also fell sharply, indicating that traders were actively shorting the token after completing the high-demand sale.

After the NFT was released, Elon Musk immediately changed his Twitter profile picture to Bored Apes, causing the price of APE to surge 20%, and then he tweeted: "I don't know...seems a little fungible." The price then returned to its previous level.

Figure: Ethereum gas fee (the fee required for Ethereum network transactions)

Data source: Etherscan (Ethereum network blockchain browser)

APE Coin holders not only suffered losses in the coin-minting frenzy, but also paralyzed the entire Ethereum network, with gas fees soaring to levels not seen since the DeFi summer, and transactions related to the Token Factory consuming more than $180 million in gas fees. Yuga Labs was heavily criticized for the chaos of the Token Factory and promised to refund the fees for failed transactions.

Market Liquidity

Türkiye’s crypto demand rises amid rising inflation

Figure: Bitcoin price and trading volume in Turkey

Data source: Spread between BTC-USD market and BTC-Flat market calculated based on Kaiko reference returns

The recent drop in Bitcoin spot prices and geopolitical turmoil are driving the use of crypto assets in emerging economies with high inflation sentiment, such as Turkey, where trading volumes surged to annual highs in April. Turkey's inflation rate reached a staggering 70% in April, so Bitcoin's premium in the Turkish market also rose to 1.7% in early May. The steady increase in BTC-TRY and USDT-TRY trading volumes since the start of the Ukrainian war also reflects that geopolitical tensions have played a role in increasing local demand for crypto assets.

The fast-growing Turkish market has attracted the attention of major crypto exchanges such as Binance and Coinbase, which are seeking to expand their operations in Turkey despite Turkey’s recent attempts to regulate the industry.

Euro stablecoins still relatively low, but trading volumes soar

Figure: Euro stablecoin transaction volume

Data source: Kaiko asset prices and trading volumes (eurs-btc, eurs-eth, eurs-usd, eurt-eur, eurt-usd, eurt-usdt)

Euro trading volume surged to an all-time high in 2022, although its volume is still lower than USD trading volume. There are only a few Euro-backed stablecoins on the market, and the above chart is based on the two most traded Euro stablecoins, Tether Euros and Stasis. Both tokens are operated by private, centralized companies; Tether Euros is a stablecoin pegged to the euro and backed by Tether, the company that operates USD Tether (USDT).

Obviously, EURT has the largest trading volume on centralized exchanges, and these volumes have surged this year. Although from a base point of view, it is far lower than the overall stablecoin market, it is reasonable to expect that Euro trading volume will be larger, and European traders do not want to have any foreign exchange risk exposure in their transactions. Considering the previous trading volume of USD, we can't help but wonder why Euro stablecoin trading has not adopted a similar level of returns as USD?

The answer is mainly two things: stricter regulation of stablecoins and their collateral in Europe; and the ECB’s existing negative return regime. For more than a decade, the ECB’s benchmark deposit return has been negative, meaning that anyone holding the Euro and its collateral (i.e., stablecoins) will actually lose money. One thing to watch is what happens to trading volumes and the Euro if the ECB decides to adopt positive returns, which may have been reflected in the last week: the surge in trading volumes in the past few months is likely due to expectations that the ECB will follow a similar rate hike pattern to the Fed, but so far, this has not yet materialized.

Market Depth Drops Before Sell-off

Figure: Bitcoin market depth

The average quantity of market maker bid and ask prices is within 2% of the mid-price

Data source: Market depth of Coinbase, Bitstamp, Bitfinex, Bittrex, ltbit, Gemini and Kraken trading platforms

The day before the 8% price crash in Bitcoin, the market depth of BTC-USD fluctuated between 3,400 and 4,400 BTC, within 2% of the mid-price. While liquidity conditions are still lower than earlier in the week, the crash itself did not have a noticeable impact on market depth, as market makers are very cautious before re-opening positions, which can cause the sell-off to continue. After the initial drop, the price of Bitcoin continued to fall over the weekend. However, on May 7, we see that Bitcoin's liquidity conditions have improved and gradually returned to pre-crash levels.

Derivatives

Funding rates trend higher during sell-offs

Figure: Bitcoin perpetual contract funding rate vs spot price

Data source: Funding rates of Binance, Deribit, Bybit, FTX, and OKEX trading platforms, 24HMA

So far this year, BTC funding returns have remained largely stable amid Bitcoin’s sideways volatility and low derivatives volumes. During last year’s bull run, traders bid up futures prices above spot prices, and funding rates grew strongly. However, recently we have noticed a change in this trend, and last week’s sell-off is an example of funding rates growing despite the bearish market conditions. A possible explanation is that the spot market sold off faster than the futures market, causing funding rates to keep growing, suggesting that the bearishness was driven by the spot market.

Open interest in Bitcoin perpetual contracts proved resilient last week despite spot market volatility that spurred more than $300 million in long liquidations.

Figure: Open interest of Bitcoin perpetual contracts

Data source: Kaiko derivatives 24-hour moving average data

The above chart lists the cumulative open interest of four exchanges - Binance, Deribit, FTX and Bybit. We find that the amount of open interest only decreased by 8% to $7.7 billion between May 4 and 8, while the spot price fell by 13% during the same period. Overall, compared with previous sell-offs, the decline in open interest was slower.

Macro Trends

Bitcoin and Nasdaq correlation hits all-time high

Figure: Correlation between Bitcoin and Nasdaq Index

Data source: Kaiko Correlation Index

Risk assets continue to move in sync as the Federal Reserve raised its key policy return by 50 basis points last week, the largest rate hike in about two decades. Bitcoin's rolling correlation with the tech-focused Nasdaq 100 recently reached an all-time high of 0.8. This is close to the traditionally strong correlation between Bitcoin and Ethereum, which is also rising and currently around 0.9.

However, despite being closely correlated to the Nasdaq 100, Bitcoin has been performing slightly better since the beginning of the year. We have noticed that Bitcoin tends to outperform tech stocks when inflation expectations increase, which may add credibility to BTC’s role as an inflation hedge.

Figure: Bitcoin and Nasdaq index ratio vs inflation expectations

Data source: Kaiko Refinitiv Fred asset prices

We plot the ratio of Bitcoin to the Nasdaq index and 5-year inflation expectations (a market-based indicator) together to predict the inflation rate over the next 5 years and observe the trend of change. However, this may also mean that Bitcoin is seen as a riskier asset and is more affected when the Fed's credibility in fighting inflation increases.

Figure: 30-day volatility of Bitcoin and Bitcoin Providers

Data source: Refinitiv asset prices

Bloomberg reported last week that “Bitcoin miners are turning their backs on traditional finance to generate a yield-generating strategy that uses their Bitcoin holdings to make money by selling Bitcoin call options.” The strategy involves selling call options on BTC that expire unexercised and lose value, but generate returns for suppliers. If the price of BTC rises rapidly, suppliers’ profits will be limited. Therefore, one would expect suppliers to be less volatile than BTC itself, all else being equal. However, as shown in the above chart, they have all become more volatile, especially the Chinese company Canaan, whose stock has seen significant volatility.