“That’s Our Two Satoshis” - What Drove The Crypto Selloff?

Jeff Dorman, CFA
Aug 21, 2023

Thats Our 2 Satoshis Logo

What happened this week in the Crypto markets?
Screenshot 2023-08-21 at 9.22.09 AM
Source: TradingView, CNBC, Bloomberg, Messari
“What drove the selloff?”  
That was the overriding question last week, and while historically there have been good answers to this question - last week, it just wasn’t that interesting.
The broader digital assets market fell roughly 10% last week, the worst week since November 2022. Unlike November’s move lower move, which was driven by the collapse of FTX, last week’s move simply did not have a defined catalyst. There were events, sure, but they weren’t explanatory.   Elon Musk’s SpaceX sold a chunk of Bitcoin and wrote off BTC holdings from 2021 and 2022, but this was largely an old story resurfaced and more of an accounting metric than a fund flow issue.  Chinese property giant Evergrande’s chapter 15 bankruptcy filing in New York was a big headline, but this, of course, was a well known restructuring that every distressed fund globally has been prepared for for the past 18 months. There was a bit of buildup that Grayscale would win its court case against the SEC last week, but that decision was delayed, which may have triggered some fast money repositioning.  But the more likely story, though boring, is simply a confluence of negative macro events.  U.S. Treasury yields have slowly risen throughout the month, the Japanese 10-year yield is at its highest since 2014, German 10-year yields reached their highest since 2011, and UK 10-year yields are back to 2008 levels. The VIX climbed out of its year-long slumber, and the US Dollar has risen steadily for most of the month on the heels of the Yuan (CNY) collapse and the US interest rate move. Overall, it just wasn’t a great setup for risk assets in general, and digital assets were no different. 
Whatever the reason, as boring as it was, the digital assets market finally broke out of its low-vol environment and chose downside over upside.  Over $1 billion in crypto derivatives market liquidations were reported across exchanges within 24 hours, the largest long liquidation event since June 2022 when Three Arrows Capital blew up. The bulk of the declines happened in a 10-minute span before stabliziing.
As a result, perpetual swap funding rates, which were near +10% prior to these liquidations, moved to negative territory for the first time since mid-July while perp futures open interest declined sharply.
The good news is that given last week’s volatility, total digital assets exchange volumes grew 24% WoW.  The bad news is that, yet again, the most dominant force in blockchain activity is trading volume itself.
Source: Arca Internal Estimates
We mentioned last week that the launch of Base, Coinbase’s layer 2 scaling solution, could potentially launch us out of this “trading only” regime and into the world of consumer applications.  And true to form, there have been a few “hit apps” launched thus far.  For example, social trading platform Friend.Tech debuted a week ago and is off to a fast start. Friend tech enables users to buy "shares" of other users, creating a market for valuing an individual's social presence.  Friend.tech has achieved over 33,000 ETH in trading volume and attracted 78,000+ registered users within a week.  
While impressive, there is, of course, some nuance.  For starters, this isn’t the first “social following” app that has launched in the blockchain world. Historically, these have failed for a few reasons.  First, no one worth following spends time trying to be followed (if they are worth following, their primary focus isn’t making a few extra bucks on a new social platform).  Secondly, the select few savvy enough to launch a blockchain-powered app and worthy of following are all largely similar accounts (i.e. crypto bros), meaning the apps lack diversity of influencers.  On the flip side, blockchain (as always) has a powerful incentive mechanism that other Web2 applications lack, namely, the threat of a token launch.  Once it was revealed that Paradigm funded Friend.tech, the assumption became that Friend-tech will soon launch a token, similar to other Paradigm-funded companies.  Thus, if you trade tokens on this new platform, or issue your own social token, you will be in line (presumably) for an airdrop.  The one area of crypto that never slowed down is farming – and the idea that you can be an early user of a new application and benefit from its future success is still just as appealing as ever. 
We’ll revisit this topic in a few months to see if the application itself has longevity, or if it’s just another flash-in-the-pan crypto griff.  But the bullish takeaway is simply that crypto is not dead, and token launches remain powerful incentive mechanisms.


And That’s Our Two Satoshis!
Thanks for reading everyone! Questions or comments, just let us know.

The Arca Portfolio Management Team
Jeff Dorman, CFA - Chief Investment Officer
Michael Dershewitz - Chief Operating Officer
Katie Talati - Director of Research
Sasha Fleyshman - Portfolio Manager
David Nage - Portfolio Manager
Wes Hansen - Director of Trading and Operations
Michal Benedykcinski - Senior Vice President, Research
Nick Hotz, CFA - Vice President, Research
Kyle Doane - Vice President, Trading
Robert Valdes-Rodriguez, CFA- Vice President, Research
Alex Woodard - Associate, Research
Christopher Macpherson - Research Analyst
Andrew Masotti - Associate, Trading and Operations
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