December 7, 2023 · Forwarded this email? Subscribe Here

Welcome to the latest edition of Galaxy's Trading and Lending market update. Each month, our team of specialists package up the latest trends, market analysis, and exclusive content and share it with you directly to your inbox.

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NOVEMBER 2023

Galaxy's Lending Desk Update

In November, our desk noted a rise in counterparties seeking to lend on term and secure a fixed rate. This trend is influenced by the prevailing market sentiment indicating a halt in the Federal Reserve's rate hikes, with potential cuts foreseen as early as the second quarter of 2024. With impending rate cuts likely on the horizon, firms may look to lock in these elevated rates while they still can. Our desk has also observed heightened demand for borrowing a basket of alternative cryptocurrencies, namely SUI, DOT, BNB, and MATIC. We continue to see persistent demand from counterparties to put on leveraged long BTC positions in anticipation of a spot Bitcoin ETF slated to be approved on or before the Jan 10th, 2024, deadline.

Looking Forward:

In the landscape of on-chain money markets, ongoing innovation is expected to attract liquidity and increased institutional adoption to the digital asset space.

As the deadline looms for the approval of a BTC Spot ETF and the impending BTC halving, we anticipate a persistent demand for leveraged long positions. Following these pivotal events, there’s potential for a shift towards ETH.

MARKET UPDATE

Basis Trading, BTC and ETH Volatility, Sparks Opportunistic Short Term Borrow Demand.

In November, traders seized opportunistic positions driven by the heightened annualized 1-month basis, coupled with a resurgence of market volatility.

The 1-month basis, derived from CME BTC Futures contracts and the BTC spot price, reached an annualized peak of just over 20% and consistently maintained levels above 15% for much of the month. When the basis trades positively, traders typically opt to borrow cash, purchase spot BTC, and short the futures, with the realized Profit and Loss (PnL) being a function of the basis rate earned minus the rate paid on the cash borrowed to initiate the position. This led to a surge in counterparties seeking short-dated borrows at rates higher than usual to execute this strategic trade.

Simultaneously, market volatility made a notable comeback in November, reflected in the spikes of BitVol and EthVol, and 30-day implied volatility indexes, reaching nearly 70%—levels not seen since April of this year. Despite the overall bullish market sentiment, there was an increased demand from counterparties looking to establish open-term shorts on ETH and BTC, aiming to capitalize on potential downward moves in market volatility.

Bitcoin and Ethereum 30-Day Implied Volatility Indexes

In conclusion, the month of November witnessed dynamic trading strategies, with traders leveraging favorable basis conditions and responding strategically to renewed market volatility.

2 Key trends

001

On-Chain Defi Rates Remain Elevated as Demand Outpaces Liquidity

In November, on-chain money markets witnessed heightened activity, resulting in prolonged increases in interest rates. The surge in stablecoin demand is likely linked to the prevailing bullish sentiment, with traders maintaining long positions in BTC or ETH and seeking liquidity for their holdings. Notably, the variable borrow rates for USDC and USDT on Aave's Ethereum V3 have experienced a steady ascent since early September, doubling from around 4% to the current 8%.

USDC and USDT Variable Borrow Rates on Ethereum Aave V3

Understanding that borrow rates are influenced by a pool's utilization rate, the escalation in variable rates can be attributed to either a reduction in liquidity within the system or a surge in demand outpacing available supply. In this scenario, it's the latter, as evidenced by the total liquidity in the USDC pool surpassing $400 million, a substantial increase from the under $275 million recorded at the start of September. Concurrently, total borrows have risen from just over $240 million to over $378 million within the same timeframe, leading to a utilization spike from just under 89% to nearly 92%.

Total Liquidity, Total Borrows, and Utilization Rateof USDC on Aave Ethereum V3

This surge in liquidity entering and swiftly being absorbed by the market is interpreted as a bullish signal for BTC and ETH. Traders appear reluctant to convert their assets into stablecoins, reinforcing the upward momentum in the market.

002

Blast Protocol Launches, Attracts Over $500mm of TVL, Emphasizing Demand for Real World Asset (RWA) and Staking Exposure.

Since its launch on November 21st, Blast, an Ethereum Layer 2 (L2) solution, has amassed over $600 million in Total Value Locked (TVL), encompassing ETH, stETH, USDC, USDT, and DAI. Positioned as an L2 platform, Blast distinguishes itself by offering exposure to staking, RWAs, and native yield.

Blast implements default interest rates of 4% for ETH and stETH, and 5% for USDC, USDT, and DAI. Staking exposure is realized by depositing ETH into Blast, which is then staked with Lido and subsequently delivered to users through a rebasing mechanism.

For RWA exposure, Blast leverages MakerDAO's on-chain T-Bill protocol. Stables deposited into Blast are converted into DAI and staked using the DAI Savings Rate protocol. The interest earned is rebased on the USDB token, minted upon stablecoin deposits.

Native yield is achieved through airdrop farming. All assets deposited into Blast are subject to a lockup until the platform's mainnet launch. While Blast has not introduced groundbreaking features to the on-chain markets, its noteworthy rapid growth underscores the burgeoning demand for yield-generating strategies.

STRUCTURE SPOTLIGHT

Shark Fin

The bullish Shark Fin structure consists of selling a knock-out call option and lending the premium to generate yield. A knock-out option is an option which expires worthless if the underlying asset reaches a predetermined barrier during its life.

The Shark Fin structure offers full principal PLUS base interest with additional bonus return from performance depending on price at maturity, for those seeking a fixed income replacement with protected crypto market exposure.

Indicative Trade Terms:

Notional: $10mm USD
Collateralization: 100% (Fully Funded)
Initial Price (Spot BTC): $38,300
Tenor: 1mo
Principal Protection: Full
Base Return: 6.0% (annualized)
Maximum Bonus Return: 21.4% (annualized)
Bonus Range: $39,000 - $45,000
Knock Out: $45,000

Benefits & Risks:

(+) Full principal protection with base return

(+) Directional participation offers a chance to boost return

(+) Customizable, can offer bullish or bearish expression

(-) May underperform fixed income returns of similar maturity/credit risk

(-) Opportunity cost of giving up participation in strongly bullish environment

Return Profile:

Note: Pricing is indicative and subject to change with market conditions. Nothing contained in this document constitutes investment, legal or tax advice. Please consult with your dedicated specialists for more information.

Notable News

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