Bitcoin (BTC) experienced a retracement of $1,420 in a matter of an hour on March 3 following the 57.7% drop in Silvergate Bank shares, which was due to significant losses and “suboptimal capitalization.” The US fintech partner bank was a key provider of financial infrastructure for exchanges, institutional investors and mining companies, and some investors are concerned that its possible demise could have far-reaching negative impacts on the cryptocurrency sector.
The pro-crypto bank dismantled its digital asset payment gateway service – Silvergate Exchange Network (SEN) – citing excessive risk. Silvergate also reportedly borrowed $3.6 billion from the US Federal Home Loan Banks System, a consortium of regional banks and lenders, to mitigate the effects of a surge in withdrawals.
Among the affected exchanges is Dubai-based Bybit, which announced a suspension of US dollar transfers effective March 10. The move comes after Binance’s international platform suspended withdrawals and deposits in US dollars on February 6.
On-ramps and off-ramps for current money have always been a problem area due to the lack of a clear regulatory environment, especially in the US. The Wall Street Journal’s March 3 story on iFinex, the holding company behind Tether and Bitfinex, created additional uncertainty. Leaked documents and emails revealed the group relied on fake sales invoices and cloaked with third parties to open bank accounts.
Despite a Wall Street Journal report claiming that Tether is under investigation by the Department of Justice, USDT (USDT) remains the all-time leading stablecoin with a market capitalization of $71.4 billion. The issue has spread throughout the sector, as on February 13 the New York Department of Financial Services ordered Paxos, issuer of the third largest stablecoin, to stop issuing Binance USD (BUSD).
Let’s take a look at Bitcoin derivatives metrics to better understand how professional traders are positioning themselves in current market conditions.
Derivatives metrics show less appetite from buyers
Traders should look to the USD Coin (USDC) premium to gauge demand for cryptocurrencies in Asia. The index measures the difference between stablecoin P2P trading in China and the US dollar.
Excessive demand to buy crypto can push the indicator above fair value at 104%. On the other hand, the stablecoin’s market supply is flooded during bear markets, causing a discount of 4% or more.
The USDC premium indicator in Asian markets has been slightly positive over the last three weeks, but nowhere near the substantial 4% premium at the beginning of January. Additionally, the metric shows weakening demand for stablecoin in Asia, which is down from 2.5% the previous week.
Even so, the current premium of 1.5% should be interpreted as positive considering the bearish news flow regarding crypto to fiat gateways.
Quarterly Bitcoin futures are the instruments of choice for sellers and arbitrage desks. These fixed-month contracts typically trade at a slight premium to the spot markets, indicating sellers are asking for more money to retain settlement longer.
Consequently, futures contracts should trade at an annualized premium of between 5% and 10% in healthy markets – this situation is known as contango and is not unique to cryptocurrency markets.
The chart shows that traders abandoned any prospect of breaking out of the neutral to bearish zone on March 3, when the underlying indicator moved away from the 5% threshold. However, the current premium of 3% is lower than last week’s 4.5%, reflecting lower investor optimism.
On the bright side, the 6.2% drop in the BTC price had almost zero impact on the Bitcoin futures markets. Further demand for bearish bets using leverage would have moved the basis indicator into the negative zone, known as backwardation.
More volatility expected on March 14
In the week after February 27, the Bitcoin price lost 4.5%, indicating that investors are indeed worried about contagion from Silvergate Bank. Although crypto exchanges and stablecoin providers have denied their exposure to the financially struggling fintech, the outage of the fintech’s payment processing system has added to uncertainty.
Analysts are now focused on the announcement of the Consumer Price Index (CPI) inflation data on March 14. Cointelegraph noted that CPI data tends to cause short-term volatility in risk assets, although Bitcoin price movements are often short-lived.
Derivatives metrics currently point to limited pressure from the Silvergate Bank saga, but the odds favor Bitcoin bears considering declining demand for stablecoins in Asia and the premium to quarterly BTC futures.
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