Leverage in spotlight as $9bn of Bitcoin futures liquidated
This week was a reminder that relentless bid-up price action in BTC cannot necessarily be
sustained indefinitely, and those investors that are most likely to be hurt by brief periods of
volatility are those using excessive leverage.
Over the weekend a record $9bn of BTC futures positions were liquidated across the major
exchanges when the Bitcoin price trended downwards more than 10% in a single session.
Leverage, of course, amplifies the dangers of retail investors attempting to trade Bitcoin
without a disciplined risk management approach.
As
per TheBlockCrypto , $7.6bn of long positions were liquidated in less than an hour when
the BTC price fell to $52,000 on Saturday 17 April. Most exchanges recorded closing traders’
long positions with a dollar value of 10 or 20 times larger than average, as the cascade effect
of falling prices rippled through the market.
And while major investment banks like JP Morgan have been touting Bitcoin’s
reduced volatility , this episode illustrates why so many investors are turning to
unleveraged market trackers like ETFs and ETPs for notionally safer exposure to cryptoasset
sector prices.
Under the radar: institutions continue buying BTC, ETH, and LTC
Even amid the volatility of the past week, and while retail traders sought to amplify their
gains by buying illiquid nano-cap and small-cap coins, institutional investors were still moving
cash into BTC and ETH in record volumes.
There is a stark parallel to be drawn here: on one side we have retail, social media-driven
speculative buying of assets with little to no mainstream utility. On the other side, we have
large-cap, liquid cryptoassets like Bitcoin, and those like Ethereum and Litecoin which offer
innovative solutions to intractable problems with existing financial services.
Dan Loeb’s Third Point hedge fund, with $17bn AUM, is
now holding crypto as a Coinbase Custody institutional client, according to filings
lodged with the US market regulator, the SEC.
Initially there were no details forthcoming from the filing on which exact assets Third Point
shifted funds into. But when industry website Coindesk tweeted their findings, Loeb retweeted
the message with his
own , saying “Outed as a HODLr”, a common market term for a Bitcoin investor, so it
appears fairly clear what the fund’s core assets could be.
Bloomberg also reported this week that Brevan Howard, a $13bn hedge fund, was beginning to
invest 1.5% of its $5.6bn main fund into digital assets. In the early 2010s Brevan
Howard was one of the world’s largest macro funds with $40bn AUM but dipped as low as $7bn. It
recorded a
99% gain in 2020 for its best year on record.
Citing an anonymous source, Nishant Kumar reported:
The initial allocation will be overseen by crypto investment firm Distributed
Global...Brevan Howard’s fund will bet on the rising value of digital assets.
British founder Alan Howard has long been an advocate for cryptoassets and as long ago as
2019 was designing portfolios for institutions. The Financial Times reported that
Howard aimed to
steer investors towards a select grouping of funds with higher quality operations, so they
can avoid blow-ups in a sector full of hazards
Brevan Howard joins a laundry list of billionaire hedge funds diversifying their asset base into
crypto. Among first to make significant investments and peek above the parapet were the likes of
the Tudor Investment Corporation, run by Paul Tudor Jones. Jones
noted in response to the trillions of monetary stimulus from central banks that
the best profit-maximising strategy is to own the fastest horse. If I am forced to
forecast, my bet will be Bitcoin.
He was followed by veteran mutual fund operator Bill Miller, whose $2.25bn Miller Opportunity
Trust
filed for the right to invest 15% of its assets into Bitcoin in February 2021. One-time
skeptics like Ray Dalio of Bridgewater Associates and Anthony Scaramucci’s Skybridge Capital
also
followed suit .
China softens stance, calls Bitcoin and stablecoins ‘investment alternatives’
Some surprising news out of China this week was that the deputy governor of the country’s
de-facto central bank, the People’s Bank of China (PBoC), told an audience of global investors
that the government was considering the use of cryptoassets as investment options.
Speaking at the high-profile
Boao Forum for Asia , Li Bo said that cryptoassets like Bitcoin and stablecoins could be
used as “investment tools or alternative investments”, rather than as currencies. This marks the
first time that the Chinese government has formally recognised the asset value of
cryptocurrencies.
Industry insiders hailed the comments as “progressive” and “significant” ,
according to
CNBC .
China’s relationship with Bitcoin and other cryptoassets — like that of many other major
economies — is in a state of flux and is still being defined. Since 2017 China has banned
project fundraising through Initial Coin Offerings and maintained its stance that cryptocurrency
trading is illegal.
At the same time, in 2021 the progressive Hangzhou Internet court
adopted blockchain smart contacts , and two years earlier ruled that Bitcoin was a
protected virtual property under law.
We regard bitcoin and stablecoins as cryptoassets...these are investment alternatives, they
are not currency per se. The main role we see for cryptoassets, going forward, their main
role is [as an] investment alternative. Many countries including China are looking and
thinking about what kind of regulatory requirements — maybe minimal but we need to have some
kind of regulatory requirement — to prevent the speculative nature of such assets [from
creating] any serious financial stability risk. And before we have a clear idea what kind of
regulation we need, I think we will keep our current regulation.
Li Bo, deputy governor, People’s Bank of
China
Macro BTC: Currency or asset?
In a macro sense Li Bo’s words perhaps speak to the kind of relationship that Bitcoin will have
with other Central Bank Digital Currencies: it will exist in parallel with fiat currencies
rather than as a replacement. In other words, bitcoin is more likely to be treated under law as
a kind of digital gold, inflation hedge and portfolio diversification asset, rather than
necessarily the alternative cross-border currency that Bitcoin was originally intended to be
when it was created in 2008.
China has a number of competing priorities given that its Central Bank Digital Currency — the
digital yuan or ‘e-CNY’ as it is now known — is well underway.
Societies worldwide are increasingly cashless — a situation exacerbated and accelerated by
Covid-19.
Last year the PBoC tested e-CNY issuances in major population centres, including Shenzen and
Chengdu. Li Bo
reported to a second panel at this year’s Boao Forum that the digital currency will be
used by Chinese citizens as well as international visitors to the Beijing Winter Olympic Games
in 2022.
According to the bank of banks, the Basel-based Bank for International Settlements, 80% of the
world’s governments are actively working on
CBDCs of their own. And we heard from UK Chancellor Rishi Sunak this week that his Treasury
Department was
launching a taskforce to accelerate the potential issuance of a UK digital pound.
Now all eyes are on these central banks for any further regulatory pronouncements.
Markets
The road to ever more bullish price predictions took a knock this week, as crypto markets
struggled to maintain their rapid recent momentum, pulling back from record-busting prices in a
sector-wide correction.
From an all-time high of $64,915.12 on 14 April 2021, BTC dipped 20.9% to briefly touch
$51,337.81, a nudge above a support level last seen in late March. The world’s largest
cryptoasset by market cap then recovered by 9.8% to reach $56,387.95.
Ethereum’s internal cryptoasset ether (ETH) managed to keep a tight grip of the gains above the
$2,000-mark that it has posted in recent weeks, with that round number level now acting as
short-term support. But it, too, could not hold on to its own all time high price level amid the
wider market pullback. From its record high of $2,543.61 set on 14 April 2021, ETH fell against
the US dollar by 21.3% before paring back those losses to hit $2,221.67.
Litecoin is celebrating its 10th anniversary of 100% network uptime this year, and briefly rose
higher in the crypto market cap stakes, swiping ninth place from Bitcoin Cash. Momentum stalled
out from an all time high of $335.40, set on 14 April 2021, before dropping as much as 30.1%.
The precipitous fall did not last, however, and LTC gained back more than 12.5% by the end of
the week to finish at $263.78.
BTC/USD
Source TradingView
ETH/USD
Source TradingView
LTC/USD
Source TradingView
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