The Eve of Quarterly Delivery: Derivatives, USD and Traditional Market Crisis

The sharp drop in the digital asset market before the quarterly delivery did not surprise everyone. Generally speaking, big fluctuations will occur before and after the quarterly derivatives delivery, but the “trigger point” is different each time. With less than 24 hours before the delivery of digital asset derivatives in the third quarter, the market value of digital assets once again shrank to US$1.96 trillion due to large-scale market changes.

Regarding this market change, there are still divergent opinions: some people think it is related to the voice of the regulators, some people think it is related to the chain reaction caused by the volatility of the Hong Kong stock market, and the deeper reasons may come from the changes in the underlying assets of the digital asset market, and Macroeconomic changes.

Derivatives: a “booster” in a highly volatile market, but it may not be the culprit

September 7 by the chain reaction triggered by only the profit-hungry, making the Bitcoin price within 24 hours, down from more than $ 50,000 to about $ 43,000 all the way, then the long-term price shocks between US $ 46000-48000, until September 20 The day fell again and once broke through the $40,000 line. The first shock caused the biggest blow to derivatives speculators in the past three months: within 24 hours, the total market liquidation reached 3.58 billion U.S. dollars, and the series of liquidation caused by high market leverage made many investors take precautions The position was liquidated and the margin trading position was urgently emptied. Although the overall market leverage has declined, since September 20, the liquidation volume for three consecutive days has reached 2.57 billion US dollars, which is still at a quarterly liquidation high.

The Eve of Quarterly Delivery: Derivatives, USD and Traditional Market Crisis

Many investors blame the market’s excessive leverage for the plunge since September 7. Due to the high price and high volatility of mainstream digital assets, the cost of holding the spot is high, so investing in index price derivatives (such as perpetual contracts) is often regarded by investors as a more cost-effective choice-they can use lower costs Get the same size of digital asset positions and income.

The problem is that derivatives are traded at index prices, not the trading assets themselves; at the same time, the index prices of most derivative contracts are only linked to the spot prices in a few major exchanges, so in the case of low trading volume, A small number of large take-profit orders in the spot market will cause significant changes in spot prices, which will drive the index price volatility; and the derivatives market, due to margin restrictions, has relatively weak tolerance for price changes, which will trigger liquidation; and Liquidation of liquidation will release the spot market makers used to hedge contract risks into the market, again putting pressure on the spot market—just like firecrackers, which will eventually trigger a series of liquidation until the market reaches equilibrium again.

However, similar situations happen every year. Late February 2021 is a classic example. Within 48 hours, the price of Bitcoin dropped by more than $10,000, but soon returned to high levels after 2 weeks. Large orders take profit/stop loss often cause large fluctuations in prices, but they will not cause long-term effects; prices will usually return to normal levels in the next 1-2 weeks. But September does not seem to be the case. It seems that the changes in the derivatives market this time do not fully reflect all market information.

Traditional market crisis? Not very reliable

There is a view that the impact of East Asian real estate market volatility on the Hong Kong stock market eventually triggered a sharp decline in the digital asset market. From the perspective of market performance, this statement seems “some truthful”, but in fact. The commodity attributes of mainstream digital assets are completely different from stocks, and the payment system and a series of related applications that the entire digital asset market relies on are also based on these “digital commodities”. The linkage between the commodity market and the stock market is not obvious. In fact, by analyzing the correlation between the historical data of Hong Kong stocks and the performance of mainstream digital assets such as Bitcoin, the author did not find the correlation between changes in Hong Kong stocks and digital assets.

From this point of view, the volatility from the traditional market does not seem to be important. But behind the stock market and the commodity market, we cannot ignore one point: the impact of macroeconomic changes on both is quite significant. So, this time the market fell, how did the macroeconomic affect the two seemingly “unrelated” markets?

Along this line of thinking, a potential influencing factor emerged: the US dollar.

Is it the dollar?

The Eve of Quarterly Delivery: Derivatives, USD and Traditional Market Crisis

The picture above shows the USD/EUR trading pair with the largest trading volume in the foreign exchange market. Although not as direct as the U.S. dollar index, considering that the transaction accounts for the proportion of the foreign exchange market, comparable to the proportion of Bitcoin in the digital asset market, the impact of the U.S. dollar on the market is extremely obvious. When the U.S. dollar rises, the euro and other non-U.S. currencies tend to fall relatively, and commodities that are closely linked to the U.S. dollar will also be affected by this.

And looking at the changes in the price of Bitcoin and the changes in the U.S. dollar denominated in euros together, we seem to be able to get some interesting information. The previous sharp declines in the digital asset market in 2021 are often accompanied by a sharp rise in the U.S. dollar, and when the U.S. dollar is at a high level, digital assets are often at a low level; changes in the U.S. dollar seem to be an inverse indicator of changes in the digital asset market. This resonates wonderfully with the foreign exchange and commodity markets-this is not accidental.

In the international market, the U.S. dollar is usually regarded as a safe-haven asset due to its high creditworthiness, as opposed to risky assets such as Bitcoin and other commodities. Compared with the U.S. dollar, other currencies are also regarded as risky assets to a certain extent. The rise of the U.S. dollar indicates the decline in market risk appetite, and more investors choose to hold U.S. dollars to resist the risk of asset price fluctuations. Therefore, changes in the U.S. dollar can be regarded as an indicator of changes in investor risk appetite to a certain extent.

As the Fed’s Taper expectation gradually became apparent, the U.S. dollar has continued to strengthen since September. The strengthening of the U.S. dollar made investors’ worries about liquidity tightening rise again, which caused some investors to start selling other risky assets other than the U.S. dollar-and this was exactly why the digital asset market on September 7 triggered a sharp drop in profit. one. The downward volatility of the market opened on September 20 is similar. On the eve of the Federal Reserve FOMC meeting, investors’ concerns about Taper in advance were reflected in the U.S. dollar market a week ago and eventually affected the digital asset market.

It is worth noting that there has been a certain delay in communicating changes in the US dollar market to the digital asset market. So, how does the volatility of the U.S. dollar ultimately affect the digital asset market?

Let’s take a look at the movement of stablecoins. Theoretically, the exchange rate between the US dollar stable currency and the US dollar has been maintained at 1:1. If only “points” are considered, then this view holds; but if “basis points” are used as indicators, “neglected corners” will appear.

The Eve of Quarterly Delivery: Derivatives, USD and Traditional Market Crisis

Compared with the U.S. dollar, the price of the U.S. dollar stable currency is actually relatively high or low. When the US dollar weakens, the US dollar stable currency is generally 5-10 basis points higher than the US dollar; and when the US dollar strengthens, the US dollar stable currency is often 3-5 basis points lower than the US dollar. The exchange behavior of investors may be an important reason for the price change of the US dollar stable currency: when the US dollar rises, investors tend to exchange the stable currency for the US dollar, which makes the stable currency depreciate; when the US dollar depreciates, the stable currency appreciates relatively.

Observe the above picture carefully. On September 7th and the day before 20th, USDT depreciated sharply, and the decline on September 19 was as high as 30 basis points. This shows that investors are buying large amounts of US dollars, while the number of stablecoins in the market has decreased significantly. If Bitcoin and stablecoins are regarded as a giant liquidity pool, when stablecoins are reduced and Bitcoins are not reduced, Bitcoins of the same size can only be exchanged for fewer stablecoins and US dollars-this is the answer.

After quarterly delivery: U.S. dollar, U.S. dollar, or U.S. dollar

With the Fed’s debt reduction expectations clear again, it is no longer important to start reducing liquidity in November or December. For investors, the movement of the US dollar will be an important indicator for judging the future direction of the market. Although Bitcoin’s computing power has recovered from a low level and the digital asset application it represents has become more widely used, the influence of the US dollar stable currency on them is still “dominant” in the short term. The flow of stablecoins determines the direction of market liquidity; at this moment when the huge liquidity pool changes, follow the trend.

 

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/the-eve-of-quarterly-delivery-derivatives-usd-and-traditional-market-crisis/
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