Bitcoin Futures Basis and Funding Rates Remain Relatively Muted Amidst Bullish Price Action
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In this report:
Market Update: Bitcoin Futures Basis and Funding Rates Remain Relatively Muted
Trend: Upcoming Token Unlocks Heighten Demand for Hedging
Trend: Ethena's Staked USDE Yields Stabilize
Market Update
In September, BTC surged from just under $53,000 on September 6th to nearly $66,000 by September 27th, marking an increase of approximately 24.5%. Historically, such rallies in the spot market have led to a spike in perpetual funding rates for BTC, fueled by heightened demand for leverage. As traders flock to long positions on perpetual exchanges, the price of the perpetual contract can diverge from the underlying spot price, driving up the funding rate. We observed a similar phenomenon in March when BTC hit all-time highs, but since then, the funding rates have remained relatively subdued, occasionally dipping into negative territory. The September rally saw more of the same as funding rates hovered around the 10% mark, typically considered an equilibrium level. Funding rates are typically a proxy for the cost of leverage in crypto, when funding spikes, so does the cost of cash and stables.
Another key indicator of the cost of capital in crypto is the BTC basis trade. Much like funding rates, the BTC basis can spike during significant rallies in spot Bitcoin. This trade involves a delta-neutral strategy where traders buy spot Bitcoin using cash and sell the front-month futures contract, thereby capturing the spread. When the basis is elevated, short-term cash becomes more expensive, as trading desks must weigh the opportunity cost of lending cash against the potential gains from the arbitrage. Throughout the rally, the basis remained relatively subdued, experiencing a brief spike from September 24th to 25th before returning to normal levels.
Overall, the September rally resulted in only modest increases in the cost of capital across the crypto industry.
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Key Trends...
Upcoming Token Unlocks Heighten Demand for Hedging as Funding Rates Surge Negative
As October approaches, several major token unlocks are set to take place, notably for SUI, APTOS, and TIA. In anticipation of these events, venture funds, early investors, angel investors, and developers are exploring strategies to hedge their exposure and lock in prices before the influx of liquidity hits the market.
To illustrate, TIA is set for a substantial token unlock on October 30, releasing 176.56 million tokens—81.94% of its circulating supply. Of this amount, ~65.01 million tokens will be allocated to venture funds.
As the unlock date draws near, the demand for hedging continues to rise. This is reflected in the TIA perpetual funding rate, which has lived in the red, at times reaching as low as –400%. This trend indicates that traders are willing to pay a premium to hedge their positions, particularly given the limited availability of alternative OTC hedging options due to constrained supply.
Ethena's Staked USDE Yields Stabilize as Funding Rates Remain Steady
Ethena USDe, a delta-neutral synthetic dollar launched earlier this year, alongside staked USDe, a yield-generating “Internet bond” derived from funding and basis spreads, has seen a normalization in yields as the market trades sideways.
sUSDe, which generates yield through ETH staking and short perpetual positions, saw its yields peak in March when Bitcoin reached its all-time highs, with funding rates soaring to 70%. This meant that long positions were paying a premium to shorts to maintain their positions, boosting sUSDe. Since then, the market has cooled, and funding rates for ETH have retreated to below 10%.
Since March, sUSDe yields have declined from a peak of nearly 50% to just above 10% by the end of September.
As yields began to decline, supply also experienced a decrease, dropping from a peak of over $3.5 billion to just above $2.5 billion by the end of September. Interestingly, during this period, the percentage of staked USDe supply increased.
Notable News
Robinhood, Revolut Explore Joining $170 Billion Stablecoin Market
Ethena Announces UStb Stablecoin Backed by Blackrock's BUIDL
Coinbase rolls out wrapped bitcoin alternative cbBTC on Ethereum and Base
U.S. M2 Approaches New Highs as Financial Assets Reach Record Levels
Fed slashes interest rates 50bps, aggressive start to its 1st easing campaign in 4yrs
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