This week was quite the rollercoaster in price action.
Bitcoin went from $44.3k -> $40.7k -> $42.3k. I was looking at 5* resorts on Saturday and switched to Airbnb shared rooms by Tuesday 😭.
We saw the first major BTC drawback since this bull rally started. Remember, it’s not going to be straight up only. Drawdowns are expected
and quite good for the market.
Here’s what we got today:
- What the flush? Investigating the recent BTC fall.
- Narrative mastery. A dashboard to track all major narratives in crypto.
- Around the web. Synthetix ended $SNX inflation, Polygon added Celestia as a Data Availability layer, and more.
Today’s email is brought to you by Kelp DAO – a Liquid Restaking Solution.
Here’s your Edge 🗡️!
What the Flush happened?
After a few weeks of “Up Only” action, $BTC fell by 7.5%.
Does this mean that the bull market is over? Far from it. This was a flush, a short-term drop in price caused by overleverage. Volatility and leverage are in the DNA of crypto markets.
Adam gave a good explanation of how it played out.
The market was taking on more and more leverage. Sky high Open Interest for $BTC indicated that. The total dollar value of Open interest across exchanges was around 12 billion.
Open Interest refers to all the derivative contracts on an asset, including futures, options, and perpetuals.
Perpetual markets don’t work like spot markets. The key difference is funding rate and liquidations. Funding rates are paid by one side (long side in our case) to the other side. Degens on ByBit were paying around 40% in annual funding rates. This will easily eat into the trader’s accounts.
The other difference is liquidation which caused the flush.
Here’s what happens: When traders create high-leverage long positions, even small price movements can get them liquidated. The BTC is sold at market to pay off the short position holders.
No one knows the exact cause of the initial sell off. One reason could be Elizabeth Warren’s new bill. She proposed a new bill called the Digital Asset Anti-Money Laundering Act of 2023.
This was an act that would effectively ban decentralized crypto. That can cause the initial sell off.
As these leveraged positions get liquidated, it can cause a cascade effect – the selling pressure from liquidations drives the price down further, triggering more liquidations. This is predictable in a market where many degens were leveraged long.
So, what to expect?
When you enter crypto, you are signing up for volatility. So, don’t get panicked at every 7% move. This has happened several times in the previous bull run. And it’ll keep on happening.
These kinds of flushes can be healthy for the market. Liquidations act as a mechanism to “punish” or correct an imbalanced market where too many traders take heavy leverage in one direction.
Think of it like a detox for the markets.
But keep in mind that not all flush-outs are good. If the market doesn’t have enough momentum, this can reverse the uptrend.
Fortunately for us, we have real momentum. Crypto had $43 million in inflows last week. This was 11th consecutive week of positive inflows. While there’s a small dip in stablecoin market cap and TVL, there isn’t anything concerning.
We can take this as a lesson against using excessive leverage for the average investors like us. “Slow and steady” is better than “fast and furious”.
EigenLayer Early Queue deposits through Kelp DAO
On December 18th, EigenLayer will lift their liquid staking token caps, enabling restakers to queue their assets for deposits; however, many potential restakers were not able to participate during the last cap lift
What if there was a better way to ensure restaking? 🤔
Kelp DAO has introduced an Early Queue for these LST deposits – it’s simple: deposit your LSTs into Kelp and let Kelp get the allocation in the EigenLayer cap for you
The Early Queue is currently live with two accepted LSTs, i.e. $stETH and $ETHx, and a cap of 5,000 tokens, respectively 🔥
But what’s Kelp? Kelp is a collective DAO designed to unlock liquidity and higher rewards for restaked assets with their single liquid restaked token, rsETH!
They have designed the Early Queue to be complementary to EigenLayer restaked points. It also offers an additional incentives through Kelp Miles!
Join the Early Queue!
A dashboard to stay on top of narratives
Let’s look at some charts from his dashboard.
The above chart tracks the monthly performance of three categories of tokens from 2017.
- $BTC performance.
- The average performance of all narratives.
- Performance of the best narrative from each month.
A side note: The chart doesn’t track the monthly BTC %change until 2019. However, that won’t affect most analyses from this chart.
At first glance, we can see that narrative trading is a highly profitable strategy. He is tracking 31 narratives. The average performance of those narratives was mostly better than $BTC performance. The only caveat is that, in some cases, when the prices fall, the average narrative falls slightly harder than the BTC narrative.
So, holding a solid narrative has better reward potential than just holding BTC.
Another interesting observation is that the difference between the best-performing narrative and the average of narratives is highest during the bull market. In the 2021 area, the difference between the best performer and average performance is much higher than in 2022 and most of 2023.
So, in the bull market, the reward is higher for rotating to the best-performing narrative.
Now, let’s look at what are the current best-performing narratives.
The above chart tracks the performance of different narratives from the beginning of the current month up to the current date. There are a few interesting observations.
Hot narratives of the bear market such as RWA, Telegram bots, and Perp Derivatives are in the negative. Money in them might be chasing newer narratives for the bull market.
Memes (34.03%) are the second best-performing narrative. It indicates that the degen behavior and high-risk appetite are coming back.
DeSci narrative, aka Decentralized Science, is the top performer at 63.16%. It is also the best-performing narrative this year by a gigantic margin. I wasn’t paying enough attention to this narrative before. This is an indicator that I should pay more attention to this narrative.
This chart tracks the average trading volume per asset from different narratives.
Layer2s and Memes are at the top. These are categories that are much more well-known and listed in centralized exchanges. So, they have a lot more volume.
Our best performer, DeSci, is at the lower end of this. Low liquidity usually means high volatility. Prices can wildly move in either direction. The consistent upward movements of DeSci indicate a solid set of believers in this narrative.
🚀 DeFi Catalysts
Synthetix has ended $SNX inflation. In the new system, stakers now automatically receive fee burn rewards.
Worldcoin released an update that will allow any web app, for example, Twitter, to verify its users. It’ll allow web apps to remove bots from its platform.
Polygon will add Celestia as a Data Availablity option for the Layer2 developers that will use the Polygon Chain Development Kit.
Gearbox Protocol’s Pure, aka Gearbox v3, is starting its public alpha test. It introduces a leverage trading mechanism that isn’t a zero-sum game.
Uniswap v3 has been deployed on Rootstock by GFX Labs, the team behind Oku’s trading terminal. Rootstack is a Bitcoin Sidechain.
f(x) Protocol has decided to launch a USD-pegged stablecoin using fUSD-xxETH pool. XxETH will absorb all the volatility.
Lyra DAO has decided to launch Lyra v2. With v2, It’ll have its own Ethereum L2 built from OP Stack.
Cardano introduced the Identity wallet. It is a mobile wallet that supports multiple identity and credential standards.
QuickSwap introduced QuickSwap Bonds. It’ll allow users to provide liquidity and receive tokens at a discount that vest over time.
Merit Circle, a GameFi-focused DAO, has gone multi-chain. From an Avalanche subnet, they’ve now expanded to Immutable zkEVM.
📰 Industry News
Flipkart, one of India’s leading digital commerce platforms, launched a dedicated chain built with Polygon CDK. It’ll be used to scale its loyalty program.
Eclipse is now live on testnet. It tries to bring the best of all worlds. Ethereum settlement. Solana Execution. And Celestia Data Availability.
Coinbase is bringing TradFi assets to onchain. The planned platform will enable investors to issue and trade digitally native debt instruments using Base.
Elizabeth Warren has introduced a new bill, Digital Asset Anti-Money Laundering Act. Under it, even miners and wallet providers will be Money Service Businesses.
Thirdweb disclosed a major vulnerability in their open-source code library that is widely used in web3.
🧠 Twitter Alpha
- Cosmos ecosystem on fire.
- Base as Regulated DeFi?
- Historical Wealth Transfer saga.
- Pendle getting some institutional love.
- Celestia Deep Dive.