Trading On-Chain: Volume 4 -DeFi Season

Its official, buying Bitcoin and Ethereum in 2020 was a great investment. If you got involved in the movement pat yourself on the back. This year was historic for crypto and you managed to be apart of it. Bitcoin has cooled off from $42,000 highs, Ethereum is pushing towards All time Highs and Alternative-Coins have been all to rage the past couple weeks.

Chart 1 — Crypto Indexes

Defi has outperformed everything over the past 7 days. The market has been red but that doesn't mean there isn't opportunity elsewhere. FTX’s DEFI-PERP index is up 22% on the week while every other Index is down.

Talking points:

  • Bitcoin Consolidation
  • Ethereum All-Time Highs Soon?
  • DeFi-Season

Bitcoin Consolidation

Bitcoin ran up to $42,000 and made a huge 28% correction down to $30,200. This has been an overwhelming move for most market participants who weren't hedged for downside. Although a lot of people were caught off guard on this move, there is a valuable lesson to take from it. People who started to take profit above $35,000 were rewarded multiple opportunities to buy back lower.

Chart 2 — Bitcoin Price

It has been a pretty brutal week for participants who bought over $40,000 on the other hand. There is a saying that more people get liquidated in bull markets then bear markets and the Liquidation data shows a lot of truth in that statement. The hardest part about trading in a bull market is staying grounded. People tend to get over-euphoric in times like these and its hard to blame them. Its honestly a recipe for disaster. Traders enter the market with over leveraged positions and poor entries expecting to make up for what they missed meanwhile there liquidation is fuel for large deviations in price like we saw last week. When we saw $30,200 there were $2.5 Billion worth of long liquidations, the most this market has ever seen.

Chart 3- Liquidation Data for BTC

Funding

Funding has cooled off since the rally to $42,000. Historically low funding rates have provided us the best opportunities to buy. Since breaking $30,000 funding has been very expensive for participants to enter leveraged longs.

Chart 4- Funding Data for BTC

On the other hand, the high funding pays shorts very well. So instead of selling spot BTC, it makes sense for market participants to enter shorts as a hedge and collect funding in times of uncertainty. Binance had a funding rate of .23% around $40,000 that settles every 8 hours. Therefore, hedging flat is a pretty profitable risk free trade.

Options

It looks like profits were taken on $36,000 strike I have been talking about since December. Option Traders are aggressively entering $52,000 and $56,000 for the January 29th Expiry date.

I double checked Deribit’s data and I found since they tweeted another $460 million were added to $52,000 strike totaling $984 million in Open Interest for the January 29th Expiry.

Chart 5- OI by Strike for BTC

Smart Money

Grayscale started adding back to their balance sheet with a new purchase of ~10,000 Bitcoin. This is a good sign for the market as this signals that Smart money is still accumulating.

Chart 6- Grayscale Activity

Key Takeaways for Bitcoin

  • $2.5 Billion in Long Liquidations
  • Profit takers were rewarded a good opportunity to buy back
  • Funding reset
  • $52k strike is getting bought up rapidly
  • Grayscale is adding more to their balance sheet again

Ethereum All-Time Highs Soon?

In Last Edition Mentioned that Ethereum was in a do or die zone. Well I’m glad to say that Ethereum made it. We defended, what I deemed the last major support before we fell off a cliff. Ethereum looks like it wants to pave the way for .04 BTC.

Image 7- ETH/BTC

I use ETH/BTC to interpret what pair is better to trade. If ETH/BTC is in a downtrend, BTC/USD will outperform ETH/USD. Conversely, if ETH/BTC is going up in value ETH/USD is the better pair to trade.

Exchange Net Flows

Ethereum has seem massive outflows since the dip under $1000. This is a sign of people buying on exchanges due to people sending to personal wallets to hold or utilize on other DeFi applications. Both of these activities provide value to the Ethereum network and are bullish for the price.

Image 8 - Exchange Net-flows

Exchange Reserves

Exchange reserves have been in a downtrend Since $180, but it just took a massive 3 Million Ethereum spike downwards. Price hasn't reacted this massive decrease in supply. This is the first time we have seen such a huge decrease in the available supply.

Image 9 — Exchange Reserves Vs. Eth Price

Key Takeaways from Ethereum

  • Ethereum has outperformed Bitcoin the past 3 weeks
  • Large sums of Ethereum is being sent off exchanges to personal wallets
  • Exchanges Reserves are rapidly depleting

DeFi-Season

This has been an amazing week for Alternative Currencies and more specifically DeFi. Dot, Sushi, Uni, Aave and Link have had exceptional returns this week and out performed the rest of the market.

Image 10 — Defi Index

Bitcoins market dominance fell from 73% to 66% which is the main reason we saw such large movements in Alt-Coins this week. Bitcoin dominance is a great representation of the way money moves from Bitcoin into other coins and vice versa. If the trend is rising on Bitcoin Dominance then BTC is the best place to keep you're money. But when the trend is falling there is a lot of opportunity as capital moves into smaller market cap coins.

Chart 11 — BTC.D

During 2018 Bitcoin Dominance fell all the way down to 30% which led to life changing returns for some. If we see Bitcoin Dominance fall that low in the coming months there will be amazing opportunity in Alt-Coin markets.

UniSwap Vs Sushi Swap

This is DeFi’s version of clash of the titans. Two massive Decentralized Exchanges fighting for market share. UniSwap has been around longer and is native to DeFI. Sushi on the other hand, has been an incredibly interesting story to follow. The original head developer cashed out a quarter of the project developer funding pool which was a sum of $13 million at the time. This cause mass hysteria at the time. Luckily for the Sushi Community. Sam Bankman-Fried, the founder of FTX and Almeda Research hopped in and took the project under its wing. Since that happened back in September, Sushi swap has been Uniswaps largest competitor and is taking a lot of there market share and liquidity.

Chart 12 — Uni vs Sushi

Both coins have outperformed the broader alt-market and its fascinating to watch the two giants go head to head to see who will come out as the best decentralized exchange.

Key Takeaways for Alt-Coins

  • Defi has been the best performing sector in crypto this week
  • Corrections on Bitcoin Dominance is good for Alt-coins
  • Uni and Sushi are battling for market share

I am an Under Graduate finance student. I have been studying Crypto Currencies since 2016 and my trading is based off of On-Chain analysis and Order Flow.