20 Jun 2022

Chaotic market following liquidations of 3AC’s assets

Three Arrows Capital (3AC) was flying too close to the sun, leading to a brutal market meltdown as 3AC failed to meet margin calls (slide 9). A market-wide liquidation of 3AC's assets ensued, leading to a plunging crypto market
Market update (10).svg
Fear of contagion from the collapse infected the market, and BTC fell below $20,000, reaching lows of $17,600 before recovering above $20,000 for the weekly close.After the sharp rebound, all the top three cryptocurrencies by market cap end the week flat. BNB is the winner after increasing 2%, ETH ends at -1%, and BTC is the worst performer after falling 2%.
Source: Tradingview (Coinbase, Binance US)
Correlations between bitcoin and other financial assets continue increasing. Bitcoin's correlation with gold has particularly increased lately and is now sitting at heights not seen since January 2021.BTC's correlation with ETH is at extreme highs, sitting at 0.93. This is close to ATH and has only been higher in March 2020 following the Covid outbreak.
Screenshot 2022-06-21 151810
Source: CoinMetrics
The past week has been great for the smaller altcoins. Of the top 50 coins by market cap, Elrond is the winner after surging 51%. It's a long time since we saw such strong performances from the smaller coins.
Source: CoinGecko,
The small caps are rebounding
Even though it has fallen 27%, the Small Cap index is the best performer in June after recovering strongly since the market bottomed out last weekend. Bitcoin is underperforming all indexes in June after falling 35%.The outperformance of small caps relative to bitcoin has led the bitcoin dominance to decline by 1.5 percentage points.We also see a continuation of the decrease in the ETH dominance. Since the beginning of May, it has declined from 19.5% to 15%, as ETH has underperformed the rest of the market.
Source: Bletchley Indexes
It’s highly unusual to see small caps performing better than bitcoin in a falling market. However, the primary driver of this crash has been the massive Three Arrows Capital margin call. In periods of insolvency, creditors unwind the most liquid assets first, which is likely the root cause of BTC and ETH’s relative underperformance in the last week. Illiquid altcoins are more challenging to sell at size, particularly during pressuring times, which explains why smaller coins have experienced less excessive selling pressure in the last week.
The crypto market has been extremely fearful for two months
The crypto market is chaotic now as several substantial market participants have already gone under, and the market knows there might be more to come. The current crypto chaos is reflected in the Fear and Greed Index, which has now signaled ‘extreme fear’ for two months straight, which has never happened before in the index’s history.
The bitcoin spot volume keeps climbing
The 7-day average bitcoin spot volume is currently $7.8 billion, close to its highest levels in the past year. Bitcoin has been very volatile lately (next slide), and we see elevated spot volumes on the most volatile days. The volume difference between specific days has also increased, as a few volatile days see very high volumes of more than $10 billion while spot volumes on most days are between $5-$6 billion.
Source: Skew, Tradingview (Binance, Binance US, Bitfinex)
Bitcoin’s highest 7-day volatility since May 2021
Several large downwards price movements have caused bitcoin’s 7-day volatility to hit its highest level since May 2021. Bitcoin also saw a significant upwards price movement as it increased by 8.5% on Sunday. Bitcoin’s recent volatility has led to a substantial increase in options prices, as traders have become more eager to hedge their positions.
Source: Tradingview (Coinbase)
This was our weekly spot market update. Click here to read our update on the derivatives markets.
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