Multi-party analysis: What is the reason for the slump in the encryption market and the out-of-control of Terra's ecology? What's the outlook?

As the Federal Reserve raised interest rates by 50 basis points, the US stock market and the encryption market began to fall sharply. Bitcoin fell to $30,000, Luna plummeted by 50%, and UST has begun to decouple. What is the reason? What's the outlook?

Griffin, Macro & Options Trader, Blofin

There is no doubt that the current crypto market appears to be out of control. Under the combined effect of multiple factors such as UST de-anchoring, the sharp drop in U.S. stocks, and the net selling of encrypted asset investors reaching a new high this year, the volatility of encrypted assets represented by BTC has risen to the highest level since the beginning of the year. Judging from the skewness data, the short-term risk aversion sentiment of the entire market has also reached a high point this year, and investors are buying a large number of put options to hedge against possible further downside risks.

Another more dangerous signal is that the premium of mainstream encrypted asset forward futures has been significantly lower than the risk-free rate of return. Under such circumstances, the expected return of encrypted asset investors is already lower than the risk-free return, and more investors may further turn to risk-free assets, and the liquidity situation of encrypted assets will be difficult to improve in the short term.

However, we have also seen some signs that the market runaway is beginning to end. The largest negative Gamma exposure ever recorded in the encryption market has been initially controlled, and the negative Gamma exposure of ETH has been significantly narrowed. The change in gamma exposure means that market makers and investors are beginning to have the initial ability to "correct" the current market invalidation trend, but the strong negative gamma exposure looks set to persist ahead of Friday's derivatives delivery, This means the continuation of high market volatility in the short term.

For now, the US CPI data for April, which will be released on Wednesday, will be the focus of reversing the current market conditions. If the CPI data is under control as everyone expects, the possibility of the Fed taking more aggressive measures will be significantly reduced, and market confidence will also be supported; It means that the negative impact of the Federal Reserve on the risk asset market will be further intensified in the future. In short, in the short to medium term, it is difficult to see the possibility of the crypto market returning to its high point.

Huobi Research Institute

From a historical perspective, the two interest rate hikes of 50BP in 1994 and 2000 produced different policy effects: the former achieved a soft landing for the U.S. economy and maintained healthy economic growth; the latter punctured the stock market bubble, making the The U.S. economy is in recession.

The 50BP interest rate hike in 1994 was successful due to two main reasons: one was the preventive pre-raised interest rate hike; the other was a stable external environment; and the failure of the 50BP interest rate hike in 2000 was mainly due to the fact that the U.S. stock bubble was already very strong at that time. In addition, the September 11 incident in 2001 broke the myth of the security of the United States and shook market confidence.

Compared with 1994 and 2000, the macroeconomic background in 2022 is turbulent and uncertain. Inflation in the United States has long been high. At this time, raising interest rates is no longer a precautionary rate hike in 1994. With the impact of the new crown virus and the war between Russia and Ukraine, the stock market bubble is relatively high. Therefore, this rate hike is now having disastrous consequences similar to those in 2000.

BitMEX founder blog post

BitMEX founder Arthur Hayes predicted in his latest article on April 11: Bitcoin and Ethereum are highly correlated with the Nasdaq 100 index. As the Federal Reserve raises interest rates, by June this year, Bitcoin and Ethereum will test $30,000 and $2,500 (both have fallen below this figure). He said he has bought put options for June 2022.

Before that, he said support levels were at $28,500 for Bitcoin and $1,700 for Ethereum. "Until these levels are retested, the market will not bottom. If the support holds, that's great, the issue is fixed. If not, then I believe there will be a clearing in Bitcoin and Ethereum. Down to $20,000 and $1,300."

BitMEX Analyst @lasertheend

Now everyone is concerned about two things, one is the decoupling of UST, and the other is whether LFG will drag the entire market down together.

I like to compare public chains/projects to countries. Each country has its own monetary policy and economic model, just like each public chain has its own ecological and currency model. For Terra, the biggest difference is that compared to other settlements that are directly settled in US dollars, Terra has adopted a "linked exchange rate system" a bit like Hong Kong. The advantage of this is that UST can obtain some privileges of printing money like the "Fed" in terms of capital efficiency. The disadvantages are of course also obvious, that is, when the public lacks confidence in UST, or when financial predators find that UST exceeds its own economic volume and is excessively excessive, and it can be profitable to short, it will be fatally hit by decoupling. Like the original Argentine peso. The current UST is also facing severe challenges.

From a fundamental point of view, we see that the demand growth of UST has been reduced due to the lower interest rate of Anchor, and there is no second "killer app" to attract more UST inflow. This makes people wonder whether UST has been "overissued". In the short term, the decoupling of UST is mainly due to the escape of large investors on the anchor -> UST is under pressure -> the market is not good -> LUNA has fallen more. This cumulative butterfly effect leads to a slow cycle of death.

As for whether the decoupling of UST will explode the market, because LFG's on-chain arbitrage mechanism has not been completed, we need to pay attention to whether LFG will continue to increase the loans to market maker BTC. The recent behavior of loans can be understood as LFG is giving market makers risk-free arbitrage opportunities. Market makers can buy Bitcoin with UST by selling Bitcoin -> exchanging for USD -> buying UST -> waiting for UST to recover peg. Because even if the bitcoin is sold off, you can use the borrowed UST to buy the bitcoin back. This partly explains the degree of despair of LFG.

The scariest thing is not that LFG sold 2 billion dollars of Bitcoin and exploded, but that the continued decoupling of UST will destroy the confidence of the entire market, and the loss of terra's confidence will spread to the entire market and traditional institutions that invest in cryptocurrencies.

Researcher Winter Soldier

There are still many similarities between the recent situation and 2018. From a macro point of view, there will be no eggs under the overturned nest. The sharp drop in US stocks that year was an important incentive for the crypto market to enter a severe winter at the end of 2018. Now the same structure is happening again. Once again, the bubble in the entire financial market is accelerating and bursting, and cryptocurrencies are not immune.

In addition, the current market crash has also superimposed some of its own factors, such as the bursting of the DeFi bubble. DeFi is the engine of this round of bull market, but DeFi is a bit like the various derivative products that detonated the 2008 financial crisis before. It is an amplifier in itself, which can amplify both returns and risks. When the market is going down, as long as the various complex nested chains of DeFi collapse at a single point, it may cause systemic risks. In particular, some projects that claim to be "risk-free arbitrage" and "white prostitution" often attract huge amounts of funds, and the risk is actually extremely high.

Finally, let me briefly talk about my views on the UST incident. After all, the current market generally believes that the collapse of UST is the direct cause of the market crash, and the future fate of UST will also affect the trend of the broader market. It is also difficult for individuals to judge whether UST can survive this time. On the bright side, the current sharp drop can be regarded as a stress test for UST. If UST is compared with the USDT of the year, USDT has actually experienced more than one crisis of trust. The exchange rate similar to UST has dropped by 20%. The extreme situation of -40% has been experienced by USDT in those years, but it was rescued back without any danger. It is precisely because of passing those stress tests that today's market generally accepts and trusts USDT. The current ordeal is the baptism that UST must go through on the way to become a god. Of course, looking at the bad side, UST is still an algorithmic stablecoin after all, and the previous algorithmic stablecoins seem to have ended badly, and UST is likely to not become the only successful special case.