Another Red Day Across Markets: Hot Money Flows Out of DeFi & OI Sinks
After opening the day higher, bitcoin, gold, S&P 500, and Nasdaq are dropping further. Meanwhile, the US dollar is 1.3% in the past four days.
Crypto markets are looking weak after losing a great deal of value Thursday, but of course, not as much as some of the tech stocks did.
Tech stocks started declining just as we entered September. Over the past three days, Tesla shares dropped 18% while Apple lost $365 billion in value, which is not only more than the market cap of 491 companies in the S&P 500 but also the entire market cap of crypto.
The strong performance of the stock market since March has been primarily because of the tech stocks, which got sold off this week as investors worry about the continuing crisis in the US jobs market.
After hitting new all-time highs on Wednesday, S&P 500 and tech-heavy Nasdaq both fell 3.5% and 4.9%, respectively. Randy Frederick, the vice-president of trading and derivatives for Charles Schwab said,
“Some of the stocks have gotten a little pricey, and what the actual cause is to spark this sell-off is difficult to say. The leading sector for quite a long time has been the Nasdaq, which is very heavily weighted in technology stocks, so people just saw this as an opportunity to take the profits off the table.”
Also, the US trade deficit expanding to the widest level since 2008, debt set to exceed the size of its economy next year for the first time since World War II, US-China tension heating up, and upcoming elections in November could be playing a part too here.
An Opportunity to Rebuild
A blow to the sentiments in the crypto market came not only because tech stocks went into sharp reverses but also “hot money flow (outflow) from DeFi,” said Denis Vinokourov of the prime broker, Bequant.
DeFi had a record $9.5 billion total value locked in it on Wednesday, which has now come down to $8.6 billion, as per DeFi Pulse. He said,
“It is a reminder that crowded trades bring with it a lot of volatility when someone begins to unwind their positions. Digital asset trades are more than aware of such dynamics, and while the bulls may be feeling particularly salty about the reversal of fortunes, the pull back offers an opportunity to rebuild.”
After falling to nearly $10,000 level yesterday, bitcoin strengthened only to follow equity markets and trading at $10,350. The crypto market, however, remains in heavy red with a few exceptions like TRX, EOS, DGB, CELO, and STORJ.
The futures market is also looking identical to the spot with open interest falling to $439 million. Volume meanwhile surged on CME, recording $1.1 billion and $941 million on Wednesday and Thursday, respectively.
The same is the case for perpetual swaps, the volume is rising, and open interest is falling, the trend suggesting a substantial amount of long positions got liquidated over the past couple of days.
On OKEx, the quarterly futures saw a negative premium for the first time since mid-May, which is “indicative of extremely pessimistic market sentiment.” Vinokourov said,
“The futures curve also flattened aggressively as leverage buyers were the first ones to look for cover, while in the options market the skew profile also offers plenty of opportunities to capture on market mispricing.”
If this CME Bitcoin futures gap needs to be filled than I say get it over with – would be okay with seeing the potential price action play out
I'm also cool if whales just push price back up from here and never bother with filling the meme gap pic.twitter.com/VsIE0v5jFH
— Josh Rager 📈 (@Josh_Rager) September 4, 2020
In the short term, the losses have quite obviously turned people bearish towards BTC. Analyst Don Alt, who has been calling for a drop for some time now, has put his target to about $8,000 now, which isn’t really outlandish as several 30% to 40% pullbacks have been usual during the last bull cycle. But for other traders, “If it goes to 8 or 7k then it goes back to 4 to 5.”