Cryptocurrency prices slumped on Monday, with Bitcoin price falling to about $27,350 and Ether going as low as $1,560. But since then, the market has recovered, and as of writing, BTC is trading at $27,637, and Ether is exchanging hands at $1,586, while the total crypto market cap is at $1.11 trillion.
This rout in crypto prices led to 41,185 traders getting liquidated for $112.83 million in the past 24 hours, according to Coinglass. The largest single liquidation order happened on Binance for ETHBUSD, valued at $4.53 mln.
As crypto prices tumbled, $100 million of long positions, traders who bet that prices would rise, were wiped out, which was the largest amount of long liquidations in a day since Sept. 11.
After Bitcoin came close to challenging a two-month high above $28,400 over the weekend, sellers took over this week. This latest price action in the crypto market came in tandem with modest declines in global equity markets and rising oil prices on renewed Middle East turmoil.
The Israel-Hamas conflict extended to its fourth day on Tuesday, and fears of the conflict spilling over to neighboring states, such as Iran, is impacting oil prices as it could disrupt supply. WTI crude oil has risen above $86 per barrel.
Market volatility tends to increase during geopolitical crises, and investors tend to leave risky assets, i.e., crypto and stocks, in favor of safe-haven assets, like the dollar and gold, which jumped in value. However, the impact of the conflict may not last for long, as past data suggests after initial uncertainty, the stock market starts to turn positive after three months.
With Bitcoin correlating with the S&P 500 index, it can be expected that Bitcoin will also show volatility in the near term. As we saw, Bitcoin price has declined by 2.8% since the Israel-Palestine war started on Saturday but is slowly returning to its previous level.
For Ether, it has been more than just the macro jitters that sent its prices sliding. The Ethereum Foundation sold $2.7 million worth of ETH tokens on DEX Uniswap, which resulted in ETH prices against BTC dropping to a fresh 15-month low of 0.0567. At the time of writing, ETHBTC is at 0.575, down from the 2023 high of 0.0780.
The wallet belonging to the Ethereum Foundation sold a portion of its allocated tokens. As per Arkham data, the wallet, tagged as a “Grant Provider,” swapped over 1,700 ETH for $2.7 million in USDC on Monday. As of April 2022, the Foundation that develops applications and programs for the Ethereum network held almost $1.29 billion in Ether and about $300 million in non-crypto investments.
This also comes after Ether futures ETFs debuted in the US in October but failed to gain much traction. This points to “very low institutional demand to add Ether exposure,” said Vetle Lunde, senior analyst at K33 Research.
Moreover, Bitcoin’s year-to-date (YTD) performance, which peaked at 90% in July, has since cooled to 67%, while Ether’s 77% uptrend in April is now at a mere 32%.
With that, Bitcoin’s dominance, its share of the cryptocurrency market, is rising to levels not seen since 2021. The largest cryptocurrency currently accounts for 48.5% of the crypto market’s $1.1 trillion value, up from 38% at the start of 2023, as per CoinGecko. If we look at Bitcoin’s past performance in October, the crypto asset has, on average, increased 24% in the month over the past decade.
This growing interest in the crypto king makes sense in the current volatile times, which, according to crypto investment services firm Matrixport, is “better than digital gold.”
In its report this week, Matrixport noted that demand for Bitcoin as a digital store of value, much like the precious metal, was a big reason the cryptocurrency grew in popularity. Currently, Bitcoin’s $540 bln market cap is equivalent to 10.8% of physical financial gold’s market cap.
This is why the potential approval of a Bitcoin Spot ETF in the US could result in inflows of $20 – $30 billion, potentially triggering a large rally in the cryptocurrency, the report said. Gold ETFs are valued at $200 billion. Matrixport then goes on to point out that Bitcoin actually has an edge over gold as not only storing assets in the precious metal is “unfashionable” in the current digital age, but it also comes with “significant restrictions when crossing borders.”
“Therefore, considering the current state of technological developments, bitcoin’s primary roles are likely as a store of value akin to gold and a speculative financial asset,” wrote Markus Thielen, head of research at Matrixport.
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A Look at Altcoins with LQTY in Focus
While majors (BTC and ETH) have recovered, what about alternate cryptocurrencies? Altcoins are also seeing some greens, with Tezos leading among the top 100 cryptos with its 8% gains in the past 24 hours, followed by ATOM with over 4% gain, while XDC, OKB, and KLY are all up by 1.1% during this time.
Now, among the top 200 cryptos, LQTY has performed well for the past month. On Sept. 12, LQTY was trading around $0.73, and in just about a month, the price has rallied more than 100%. This week, the token is up 23.5% as it hit $1.48 on Tuesday. However, the token is currently down 98.9% from its almost $147 peak in April 2021.
At the time of writing, LQTY has been trading at $1.46 while managing $150 million in 24-hour trading volume, which is an increase of 69% from a day ago.
LQTY is a $135.8 million market cap token that started 2023 around $0.575 and by mid-March surpassed $3.30. This represents a rally of about 500%. During the first quarter of this year, several developments took place that helped boost LQTY’s price.
In Feb., the world’s largest crypto exchange, Binance, listed the token and opened up trading for spot trading pairs LQTY/BTC and LQTY/USDT. Currently, the LQTYUSDT pair on Binance accounts for 31% of the asset’s total volume.
In March, the token gained massive interest following the chaos from the depegging of the second largest stablecoin Circle’s USDC, causing USDC to plunge to multi-year lows. This resulted in a win for the decentralized platform where loans are taken out in the protocol’s primary token, LUSD. The stablecoin retained its dollar peg at the time while the crypto project’s secondary token, LQTY, recorded a stellar upside, and the wallets holding LUSD stablecoin jumped about 10% in less than ten days.
At the time, the token also benefited from the New York regulator ordering Paxos to stop minting its centralized dollar-pegged cryptocurrency, BUSD. This triggered fears of a regulatory crackdown on the broader centralized stablecoin ecosystem, underscoring the need for decentralized and censorship-resistant stablecoins like Liquity’s LUSD.
The last 18 months haven’t been good for stablecoins as the entire market cap of these assets dropped by 35% to $124 billion, from May last year’s peak of $189 bln, as per crypto data provider DeFiLlama.
Following last year’s collapse of Terraform and its native stablecoin UST, retail participation has all but died down, and as a result, volume and liquidity have vanished. Daily trading volumes are currently sitting at $50 bln, which during the bull market of 2021 were between $150-300 billion. Not to mention, the US treasury yield has been surging, hitting decadal highs.
Currently, the stablecoin market is highly concentrated, with Tether’s USDT accounting for 67.55% of it, and combined with USDC, DAI, TUSD, and BUSD, they all account for over 95% of the entire market capitalization.
When it comes to Liquity’s LUSD, it is the 12th largest stablecoin with a market cap of just over $241 million, having a mere 0.195% of the total stablecoin market. LUSD’s market cap has also been on the decline since late August when it was at $300 million. The year before that was a good one for the stablecoin, as at the beginning of 2023, its market cap was around $180 million. It was during the bull market of 2021 that LUSD’s market cap peaked at $1.55 billion in May.
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Liquity: A Decentralized Borrowing Protocol
Founded by Robert Lauko and Rick Pardoe, the whitepaper and the LQTY token of the platform were launched in April 2021.
LQTY is the native token for the decentralized borrowing protocol and has a maximum supply of 100,000,000 tokens. The token powers the Liquity protocol and is used to incentivize early adopters and frontends. Frontend Operator provides a web interface to the end user, enabling them to interact with the protocol. Additionally, LQTY holders can stake their tokens to earn a portion of fees generated by LUSD redemptions and loan issuance.
The way the platform works is users deposit ETH into the protocol as collateral and take out loans in LUSD. The borrower needs to maintain a minimum collateral ratio of only 110%. There is no variable interest rate for drawing loans at Liquity but rather a one-time fee. A Trove is where the user can take out and maintain their loan, which is linked to an Ethereum address.
Liquidity currently has $597.8 million in total value locked (TVL), up from $411.37 mln at the beginning of 2023 but down from the $4.5 bln peak in May 2021, as per DeFiLlama. Moreover, 40K ETH worth about $65 mln has been staked. The protocol is currently earning $7.43 mln in annualized fees.
In Its Q2 2023 report, the protocol noted that after seeing all-time lows in TVL, LUSD supply, and Trove count in Q2 of 2022, Liquity has been approaching pre-bear market numbers. During this period, LUSD supply on Optimism grew to 7.9M and reached 8M on Arbitrum. Also, LUSD ventured into its first zero knowledge rollup, zkSync.
The Liquity team noted that even during the bear market, LUSD maintained its peg with chicken bonds, concentrated liquidity, and users bridging onto L2 and selling LUSD to other stables, contributing to a progressively tighter peg throughout Q2.
During this period, Dopex joined Olympus, Synthetix, and other mature DAO treasuries to add LUSD to its holdings. Chicken Bonds is Liquity’s novel sister protocol that also began to see some traction as yield-bearing collateral took center stage in DeFi, largely due to protocols building on top of staked ETH. Meanwhile, the Trove count increased by 170 in Q2, continuing its upward trend that began in Q2 ’22, and active Troves reached 1220, only 6% off the all-time high mark.
“Liquity continues to do what it does best, providing a decentralized, robust stablecoin and a venue for ETH holders to borrow off their assets at a low cost,” noted the protocol at the time.
Currently, the Liquity team is preparing for Liquity V2, which is scheduled for public availability in 2024. Back in late July, the team announced that it is building an alternative product that aims to crack the stablecoin trilemma: decentralization, stability, and scalability.
While Liquity v1 pioneered the hard peg boundaries between $1 and $1.10 by introducing redeemability and reducing collateral requirements, Liquity v2 will introduce principal protection to keep losses in check during market downturns and a secondary market into the system to minimize liabilities stemming from principal protection.
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Concluding Thoughts
While prices are facing uncertainty, digital asset investment funds witnessed their largest inflows since July. The inflows for the second week totaled $78 million, with Bitcoin funds seeing the largest proportion of it at $43 mln. Bitcoin trading volumes also rose by 16% last week.
Elsewhere, recent research reveals that crypto fundraising in Q3 of 23 declined to levels last seen in the final quarter of 2020. The last quarter recorded new lows in both funding amounts at $2.9 bln, and deal counts at 297 deals, a 36% drop from the previous quarter. Notably, investors have shifted their focus from later-stage projects to early-stage projects in the last three years.
While the market is nowhere near the 2021 levels, it is certainly seeing a recovery from the brutal 2022. As for crypto prices, they are expected to remain volatile, with interest rates high and geopolitical events driving the markets.