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BTC and ETH Front Month Basis Spike as Election Results Lead to Market Rally

BTC and ETH Front Month Basis Spike as Election Results Lead to Market Rally

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In this report:

  1. BTC and ETH Front Month Basis Spike as Election Results Lead to Market Rally

  2. On-chain USDC Rates Soar as Borrowing Demand Hits Yearly Highs

  3. BTC and ETH Funding Rates Rise as Market Rally Drives Surge in Leverage Demand

Market Update

November proved to be a pivotal month for the crypto market, as the outcome of the 2024 U.S. Presidential Election fostered an optimistic outlook for the industry's future. At the start of the month, BTC was trading around $70,000, before soaring to nearly $99,000 by month's end—an impressive gain of over 40%. ETH followed a similar trajectory, rising from approximately $2,600 to around $3,700, also marking a 40%+ increase.

This rally in spot prices, fueled by broader market optimism, pushed futures prices higher, unlocking attractive yield opportunities through basis trading. Traders are able to capitalize on the arbitrage between spot and futures prices by buying spot and simultaneously selling front-month CME futures contracts. This strategy allows them to earn delta neutral yield on idle capital.

For both BTC and ETH, basis yields climbed steadily throughout the month, rising from just below 10% to above 15%, and even spiking to over 50% at times. As basis yield increases, the opportunity cost of lending cash externally also rises, pushing up cash rates to adjust for the increased credit risk of external lending. This dynamic further reinforces the correlation between spot prices and cash rates.

Nov 2024 BTC-FrontMonthAnnFutures
Nov 2024 ETH-FrontMonthAnnFutures

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Key Trends...

On-chain USDC Rates Soar as Borrowing Demand Hits Yearly Highs

In November, USDC rates on Aave Ethereum V3 soared to over 40%, a dramatic rise from just above 5% at the start of the month. This sharp increase in rates was driven by a surge in demand, with total borrowings climbing to over $1.8 billion—up from $1.4 billion at the start of the month and reaching yearly highs.

Nov 2024 Variable-USDC-BorrowRate
Nov 2024 Total-USDC-Borrows

This heightened demand, likely fueled by the appetite for leverage during the market rally, pushed the platform’s utilization rate above 95%, surpassing the optimal level of 92%. We expect these rates to normalize either as new suppliers enter the market to capitalize on the elevated yields or as borrowers begin to repay their loans, with the high rates potentially driving some traders to exit.

Nov 2024 USDC-UtilizationRate

BTC and ETH Funding Rates Rise as Market Rally Drives Surge in Leverage Demand

Much like the basis trade and on-chain rates, funding rates also spiked during this period, providing a clear indication of overall leverage in the market and which side of the trade it is skewed toward. Positive funding rates signal more long positions, while negative rates suggest a dominance of shorts. The extent of this skew can be assessed by comparing the current rates to the historical norm, which has been around 10.95%.

As spot prices surged, we saw BTC funding rates on Binance jump to over 50%, with Hyperliquid even exceeding 100%. Similarly, BTC funding rates spiked to 40% on Binance and over 80% on Hyperliquid. Notably, Hyperliquid, a preferred venue for on-chain traders, tends to be more volatile.

Like basis rates, funding rates offer valuable insight into the "market price" of leverage within the crypto space. When funding rates rise, it indicates heightened demand for leverage, which in turn drives up over-the-counter (OTC) lending rates.

Nov 2024 BTC PerpetualFundingRate
Nov 2024 ETH-PerpetualFundingRate

Notable News

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