Quarterly Delivery, US Dollar Strengthening: Weekly Market Review From TokenInsight

This week, mainstream cryptos were greatly affected by liquidity factors. Before the FOMC meeting in September, concerns about shrinking liquidity caused a large number of investors to "withdraw" from the crypto market, triggering huge market volatility. But considering that it coincides with quarterly derivatives delivery, market volatility is still in the normal range.

The size of derivatives delivery in this quarter even slightly exceeded the semi-annual delivery size on Jun 25. Take the options market as an example, the size of options delivered on September 24 is estimated to be no less than $4.712B.

The Fed's interest rate resolution on Thursday eased market tensions and market volatility fell significantly after that. However, considering that US regulators will impose stricter regulatory measures on cryptos in the future and the fact that the marginal contraction of liquidity has begun, the future trend of US dollar liquidity will dominate the market trend in the short and medium term.

Before and After Quarterly Delivery: Liquidity Changes Triggered a Sharp Market Shock

Since Sep 20, affected by the exodus of market liquidity, the crypto market has once again experienced a sharp downward shock. Bitcoin prices were once below $40,000, and market volatility has jumped due to the combined impact of liquidity changes and the approaching delivery of derivatives. However, from the overall data in Sep, since the sharp drop around Sep 7 has reduced the leverage level of the market to a certain extent, the large-scale exodus of liquidity around Sep 20 did not actually have an excessive impact. From the perspective of implied volatility, the market confidence of professional investors is still relatively strong.

Judging from the turnover in the derivatives market, the delivery pressure has been released around Sep 20-22, so the turnover of derivatives on the delivery day is actually not high. As of 15:00 (UTC + 8) on Sep 24, the turnover of perpetual contracts is about $74.3B, of which the trading volume in Binance exchange is about $33.5B, and the trading volume of perpetual contracts on exchanges such as Huobi and Bybit are all around $6B.

It is worth noting that Huobi's intra-exchange perpetual contract positions have recovered. Compared with the last quarterly closing, Huobi's intra-exchange positions have recovered to about $1.4B, up about 27.3% from the end of the previous quarter.

However, from the perspective of skewness and futures premium term structure, the market attitude is still generally cautious. The skewness of mainstream cryptos continues to be negative in the near future, while the October futures products premiums are generally less than 4%, on the edge of negative premium, while the market forward futures premium is relatively stable.

Liquidity Contraction Expected to Strengthen, Regulatory Pressure Surged

This week, institutional activities had relatively little impact on crypto prices, while regulatory pressure on the crypto market rose sharply again after May.

In East Asia, the People's Bank of China issued a "Notice on Further Preventing and Handling the Risk of Speculation in Virtual Currency Trading", which mentioned that overseas crypto exchanges providing services to residents in China through the Internet are also illegal financial activities, and staff providing marketing promotion, payment and settlement, technical support and other services will also be investigated for relevant responsibilities according to law. In addition, South Korea will close more than 40 exchanges that do not meet regulatory requirements on Sep 25. Strong regulation in East Asia may push up market risk aversion, but considering that the volume of transactions from the Asian region has dropped significantly since May, regulatory risks have been basically cleared, and the influence of regulation from the Asian region on the crypto market in the future will be relatively limited.

In the US, SEC Chairman Gensler said on Tuesday that the SEC has "strong" authority to regulate cryptocurrencies, congress can help regulate stable currencies, and the US Treasury Department said it would impose more sanctions on cryptocurrency services that help illegal practices, with crypto platforms such as "nested exchanges", "hybrid exchanges" and "peer-to-peer" receiving priority attention. In addition, US President Biden plans to nominate Omarova, a law professor who has criticized cryptocurrencies and advocated a greater role for the government in the banking industry, to head the Office of the Comptroller of the Currency.

The US House of Representatives has passed the 2021 defence budget bill, which includes provisions related to cryptocurrencies. It is understood that the defence budget bill usually has broad bipartisan support in the US and is regarded as a must-pass bill. However, the provisions related to cryptocurrencies in the bill may soon be incorporated into law. The bill is currently awaiting Senate approval. At the same time, the proposed bill will require the US Securities Regulatory Commission and the Commodity Futures Trading Commission to clearly define which institution supervises which aspects of the crypto market. In addition, Congress will establish a working group composed of representatives of the SEC and CFTC within 90 days of the passage of the bill.

There is no doubt that the deflection of US regulatory wind may further promote the outflow of liquidity from the crypto market.

Although the Fed's interest rate resolution on September 24 has not yet released the details of Taper and kept interest rates unchanged, the liquidity contraction has actually begun: the Federal Reserve accepted $1.35T in fixed-rate reverse repos, continuing to brush a record high for five consecutive days. The New York Federal Reserve raised the limit for counterparties in the overnight reverse repos to US $160 billion on Sep 24. At the same time, UK interest rate futures prices show that the Bank of England is slightly more than 80% likely to raise interest rates by 15 basis points by February 2022. Under this influence, US Treasury yields have risen sharply. Although the liquidity contraction will not have a significant impact in the short term, the strength of low-risk assets such as the US dollar under the liquidity contraction will change investors' risk appetite in the medium and long term, and the liquidity outflow pressure in the crypto market may continue.