WASHINGTON: A year ago, crypto was riding a wave of White House support, Wall Street enthusiasm and expectations of a new golden age.
Then came October’s historic crash, wiping out a record US$19bil in leveraged bets in a single day, setting off an industry-wide retrenchment and exposing the fragility of a market structure supposedly coming of age.
About 12 months later, market bellwether bitcoin remains more than 30% below its record high.
Attempts at a sustained rally have repeatedly faltered and traders have been slow to rebuild the leveraged positions that once powered crypto’s biggest booms.
Total open interest in bitcoin-linked perpetual futures – a gauge of traders’ appetite for leveraged bets – stood at about US$45bil a year ago, according to CryptoQuant data.
It more than halved in the six months after the crash.
Bitcoin’s recent rally above US$80,000 restored some confidence, but open interest in the world’s biggest token remains well off its peak.
Still, the malaise hasn’t stopped banks and major trading firms from experimenting with digital assets.
More important than whether leverage returns is whether the market itself has become more resilient, said Julia Zhou, president at crypto market maker Caladan.
“More than US$19bil in leveraged positions were liquidated within 24 hours, but the bigger issue was how quickly available liquidity disappeared when the market needed it most,” Zhou said.
Today, while traders understand the risks better, “the market remains highly fragmented, and liquidity can still deteriorate rapidly”, she added.
The case for a stronger market today is that leverage is lower, exchanges offer less-correlated assets and some venues have beefed up liquidation systems.
Meanwhile, investors haven’t lost their taste for gambling, but have turned to new frontiers.
Prediction markets are drawing crowds, and perpetual futures or “perps” – long a staple of crypto trading – are being used to place leveraged bets on stocks, commodities and other real-world assets.
Put another way, some of the very machinery that helped turn crypto into a speculative phenomenon is finding uses well beyond the tokens it was designed to trade: Wall Street is forging ahead with stablecoins, tokenisation and the financial infrastructure built on blockchain technology.
Open interest in perpetual futures for real-world assets, virtually non-existent a year ago, today stands at more than US$17bil, according to DefiLlama data.
Much of that has been driven by Hyperliquid, the offshore crypto exchange, which was an early mover in tying perps to stocks and commodities.
The shift “tells a growth story of people that want yield and settlement on rails that never close, not from people chasing a narrative or a buzzy memecoin”, said Adam McCarthy, head of research at trading firm LO:TECH.
The never-ending quest for higher returns helped make bitcoin the world’s best-performing financial asset since its inception 17 years ago. For long-time crypto-market participants, the increased institutionalisation of the sector and corresponding rise of fresh alternatives from perpetual futures to sports betting are seen as an inflection point.
In a report released last week, QCP Capital said it expected bitcoin to be stuck in a range of US$80,000 to US$90,000 in the fourth quarter.
The structural case for crypto remains intact, but flows alone aren’t enough without a dominant catalyst, the firm wrote.
A year out, the market looks fundamentally different, Galaxy Digital said in a report last Friday.
Despite the failure of US crypto regulation in September, federal regulators are moving ahead with plans to strengthen trading with guidelines over the use of collateral and margin.
“For the most part, the market that crashed on 10/10 doesn’t really exist anymore,” wrote Lucas Tcheyan, vice-president of research at Galaxy Digital.
“The one that replaced it is just starting to get priced in.” — Bloomberg
