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Deleveraging Event Reduces Open Interest and Normalizes BTC Funding Rates

Deleveraging Event Reduces Open Interest and Normalizes BTC Funding Rates

In this report:

  1. Market Update: Deleveraging Event

  2. Trend: Cooling Crypto Market

  3. Trend: Tokenized Real-World Credit Assets

Market Update

In June, the crypto markets were relatively quiet until June 24th, when news hit about the Mt. Gox bankruptcy estate's plan to begin BTC repayments in early July, with 140,000 BTC expected to be distributed. This news caused over $150 million in long liquidations and pushed the BTC price down from above $62,000 to just below $59,000, before regaining the $60,000 level. This deleveraging event resulted in a significant decrease in open interest on the BTC:USDT Perpetual Futures contract on Binance, sliding from approximately $4.9 billion to $4.55 billion in a single day - a trend that had persisted throughout the entire month.

June 2024 BTC-USDT-PerpetualFutures

Funding Rates, which are an indicator of the market's sentiment and the cost of financing, slipped to 0% before normalizing back near the 10% mark. Since the start of the month, BTC funding has remained relatively stable around its natural level of 8-10%. During these types of market conditions, cash is generally cheap and available as the lack of bullish conviction decreases the demand for leverage, with cash on the sidelines looking for short-term yield strategies, typically in the lending markets.

June 2024 BTC-PerpetualFutures

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Key Trends We're Tracking...

Cooling Crypto Market Dampens On-Chain Borrowing Demand

The crypto markets experienced a pullback in June, with Ethereum slipping from over $3,800 to under $3,400, and Bitcoin declining from above $70,000 to below $60,000 before recovering. This recent price action, as well as the broader trend since April, has led to a stabilization of on-chain interest rates.

June 2024 BTC-Price
June 2024 ETH-Price

On-chain rates, which serve as a barometer for market sentiment and overall demand for leverage, have been hovering around the 8-10% level for the past three months. This typically indicates a low demand for leverage. However, the total amount borrowed has increased while rates have stabilized, suggesting that new supply is entering the market, driving utilization rates lower.

June 2024 AvgStablecoinBorrowRate

On the Ethereum Aave V3 platform, for instance, the available USDC liquidity has spiked in April and has generally been grinding higher since the beginning of the year, indicating that supply yields are attractive to traders seeking delta-neutral strategies.

5-June 2024 USDC-UtilizationRate

In response to these market dynamics, the Maker DAO Governance, which controls the Maker market and the Dai Savings Rate (DSR), made parameter changes in May. This included decreasing the DSR rate from 10% to 8%, aligning it with the supply rates across the money market protocols. The Stability Rates, or Interest Rates, were also reduced by 200 basis points across the curve to bring them in line with the rest of the market.

June 2024 DSR-Balance-Rate
Summary of Proposed Parameter Changes

Overall, the crypto money markets are experiencing a cooling period, with new supply entering the systems and demand for leverage continuing to wane.

Demand for Tokenized Real-World Credit Assets Continues to Grow

The real-world asset (RWA) tokenization market has continued to gain significant traction, particularly in the private credit and home equity line of credit (HELOC) sectors. This growing interest has been primarily fueled by the higher interest rate environment, increased institutional participation, and strong consumer demand.

Since the end of December 2020, the total outstanding tokenized private credit loans have surged from just over $900 million to nearly $8 billion as of the end of May 2023. This rapid expansion has been driven by the ability of tokenization to provide investors, who were traditionally excluded from these markets, access to more liquid, transparent, and efficient investment opportunities.

June 2024 On-ChainPrivateCreditMarket

Some of the key players in this space include Maple Finance, Goldfinch, and Centrifuge. However, the fintech firm Figure has been at the forefront of the recent growth, particularly in the HELOC segment. Figure has leveraged its proprietary Provenance blockchain-based platform, known as DART (Digital Asset Registration Technologies), to enable the seamless origination, pledging, and trading of these asset-backed loans in the form of tokenized electronic notes (eNotes).

RWA Table 1200w June

The rapid expansion of the RWA tokenization trend reflects the industry's continued evolution, as it works to cater to the growing demand from institutional investors and enhance accessibility in previously illiquid private credit markets.

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