April 2021 Market comment

The month of April was marked by bitcoin reaching its new all-time highs on April 14 at $64,829, followed by a sharp decline of more than 20% sending the digital currency briefly below $50,000.

This strong correction was triggered by the news of a supposedly 50% decrease of the hash rate of bitcoin mining pools caused by an outage in Northwest China; combined with a tweet about crypto money laundering claims with no source. This ignited a cascade of liquidations of overleveraged longs in the retail market.

This tendency of gaining momentum setting the price at a new all-time high followed by a massive unwinding of highly leveraged longs causing a cascade of liquidations is not dissimilar to what we witnessed back in February and March 2021.

The driving forces behind this recurring deleveraging event are purely technical:

• retail investors with massive leverage, huge open interest, hence more sensitivity to potential reversion in price action.

However, what stands out this time:

• The magnitude of this liquidation momentum was unprecedented: $7bn liquidations in 1hour / $10bn were liquidated in the crytpo market in 24 hours;
• Open interests contracted from 13bn to 9bn on Binance (-30%), Bybit( -25%), Huobi (-22%), Okex (-20%), FTX (-15%);
• Low liquidity on a weekend;
• Term-structure in backwardation. Bitcoin futures basis went negative, Binance quarterlies went from +30% to -40% in a matter of minutes;
• Funding went strongly negative: bitcoin funding rates crashed to lowest levels in 7months.

Looking at the fundamentals, it is worth highlighting the following dynamics:

• Bitcoin market cap dominance, i.e. bitcoin’s share of the overall market capitalization of digital assets, is shrinking. While bitcoin dominance was around 70% vs. other coins at the beginning of the year, it has declined steadily to cross the 50% mark, the first time since 2018. This ‘alts’ outperformance clearly indicates that the market is back to risk-on mode.
• Increased idiosyncratic risk as top 10 digital assets price correlation is sharply decreasing. This trend is mainly due to the consistent price growth of Ethereum, Exchange tokens & DeFi capturing the most increased interest and outperforming bitcoin. This can also be technically explained by high-leverage open interest on some coins with shorts getting liquidated during the rally, causing some more extreme price movements.