Bitcoin Futures Basis Spikes with Renewed Market Optimism
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In this report:
Market Update: Bitcoin Futures Basis Spikes
Trend: Aave Governance Slashes Optimal Lend Rates
Trend: Demand for Tokenized Treasuries Pick Up
Trend: Ethena Yields Fall in the Wake of Highly Anticipated Airdrop
Market Update
In July, Bitcoin experienced a notable price movement, bottoming out just below $55K before rising to over $70K, only to lose momentum later. This volatility can be attributed to several factors, including reduced selling pressure from the German government and Mt. Gox. However, a significant portion of the surge was driven by anticipation of BTC Nashville, a highly anticipated event.
Ahead of this event, the annualized basis for front month Bitcoin futures spiked dramatically, increasing the cost of short-term cash. The BTC basis reflects a delta-neutral strategy where futures contracts are priced significantly higher than the spot price, creating an opportunity for traders to buy spot BTC and simultaneously short futures to capture the spread. Leading up to the event, the annualized basis yield surged above 40% before settling around 8% afterward.
Additionally, BTC funding rates across major exchanges rose, though less dramatically, highlighting an increased imbalance between long and short positions in the perpetual futures markets. This imbalance also contributed to higher short-term cash rates.
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Key Trends We're Tracking...
Aave Governance Slashes Optimal Lend Rates from 9% to 6.5%, in response to a decrease in the Dai Savings Rate (DSR)
On July 25th, Aave governance approved the “Stablecoin IR Curve Amendment,” a proposal designed to reduce borrowing costs on the protocol. This adjustment lowers the optimal borrowing rate from 9% to 6.5%, while maintaining the same optimal utilization rate. The change affects markets for USDC, USDT, DAI, and FRAX across both Aave Ethereum V3 and V2.
This update, and other such updates, are driven by several factors, but two key considerations are the reduction of interest rate arbitrage opportunities and better alignment with broader market conditions. Interest rate arbitrage involves borrowing at a lower rate and entering a delta neutral position with a higher yield. This practice is prevalent in DeFi and other markets, where assets on one venue may be mispriced from the same assets on another. Such arbitrage opportunities often arise between Aave and Maker, two of the largest on-chain money markets.
In March, Maker increased the Dai Savings Rate (DSR) to counteract DAI selling pressure triggered by yields from Ethena and staked Ethena USD (sUSDe). This adjustment led to significant arbitrage between Aave's borrowing rates and the yields on staked DAI. In response, Aave raised its optimal yield to 14%. As sUSDe yields have moderated and the market has stabilized, Maker has begun lowering the DSR, which currently stands at 7%. To stay competitive, Aave has adjusted its borrowing rates in line with the DSR and Maker’s stability fees.
This change has been well received, reducing the cost of leverage across DeFi. In July, total liquidity of USDC on Ethereum Aave V3 increased from $1.37 billion to $1.53 billion, a rise of $160 million. Simultaneously, the utilization rate grew from 87.7% to 89.9%, indicating strong borrowing demand that outpaces the increased supply, likely due to the lower borrowing rates.
BlackRock's BUIDL continues to gain Market Cap as demand for Tokenized Treasuries picks up.
BlackRock's tokenized treasuries fund, known as BUIDL, has experienced consistent growth in both total value locked (TVL) and number of holders. Since April, the fund's assets have surged from $280 million to nearly $520 million—an increase of $240 million. This rising interest is driven by on-chain participants seeking a more secure alternative to traditional DeFi yields, while still enjoying the benefits of immediate settlement.
Ethena Yields Fall to Low Teens in the Wake of Highly Anticipated Airdrop.
A few months ago, Ethena's yields peaked at around 30%, but they have since dropped to the low teens. This decline followed a much-anticipated airdrop that encouraged users to trade yield for protocol tokens. Additionally, this drop aligns with a broader market trend of decreasing funding rates. Ethena initially launched during a surge in positive funding rates in March, a period marked by strong market gains. Since then, as the market structure has shifted, Ethena's yields have decreased considerably due to their model's heavy reliance on positive funding rates.
Notable News
Superstate Debuts New Fund to Profit From Bitcoin, Ether 'Carry Trade'
Fed to cut rates twice this year, with first move in September, economists say
Mt. Gox creditors start receiving bitcoin and bitcoin cash on Kraken
BlackRock’s BUIDL Crosses $500 Million in Tokenized Treasuries
Germany Speedruns Bitcoin Selloff, Moves $900 Million in Just 8 Hours
Wall Street's Cantor Fitzgerald to Open Bitcoin Financing, Lending Business
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