Bitcoin fell sharply on Monday as a result of the SEC’s action against Binance and Coinbase, causing it to reach lows not seen since March 17 and retest range highs from February 21 before settling at $25,700. According to a K33 report , the recent drop from highs above $28k has further extended the trading range, indicating a new volatility regime ahead.
The SEC suing Binance was the primary driver of Monday’s 5% drop. Paxos was ordered to stop issuing BUSD earlier this year, and the CFTC sued Binance for deliberate violation of federal laws. Regulation enforcement in the United States has made 2023 a difficult year for Binance, and the final conclusion of the robust push against Binance is now public. The majority of the accusations against Binance are related to its presence in the United States and may cause the exchange to shut down its U.S. service entirely.
Following the news of the SEC’s action against Binance, the futures market experienced its highest long liquidation volume this year, as a sluggish and steady market environment conditioned traders to take on more risks. In the aftermath, open interest rose, while funding rates on Binance plummeted deep into negative territory, potentially indicating that the market has become unduly exposed to future downsides. CME activity also increased during the fall, accompanied by a steep drop in CME basis as bearish flows predominated.
Same as Binance, Coinbase stocks fell -9% in yesterday’s volatile market, possibly due to the SEC’s arguments to categorize large altcoins as securities, as discussed more below. Just as this piece was about to be released, the SEC announced that it was suing Coinbase for making crypto asset securities available.
Multiple reasons were used by the SEC’s actions against Binance to classify key altcoins as securities. In the bar chart below, the afflicted cryptocurrencies are highlighted in red. Security classifications would have an impact on other US crypto exchanges, forcing the closure of many cryptocurrency pairs and maybe explaining COIN’s weak Monday performance.
The SEC used ICOs and post-ICO allocations as primary reasons against this cryptocurrency. ETH, despite similarities in its present staking scheme and ICO to some of the highlighted coins, was not implicated as a security. This silver lining could explain why ETH outperformed BTC during yesterday’s sell-off.
The SEC’s lawsuit against both Coinbase and Binance did little to increase the already suppressed implied volatility in BTC options, as options IVs remain at all-time lows. The current crypto options regime is peculiar, since market makers and funds continue to sell options in expectation of prolonged market dryness.
Monday Saw an Increase in Volume
During the Monday, June 5, volatility, trading volumes increased, with Binance having its largest day BTC volume since April 27, and the remaining exchanges seeing their greatest daily volume since May 12. Despite the increased volume on Monday, the 7-day average remained relatively low due to low volume over the weekend. Nonetheless, the spike in activity on Monday, backed by a jump in derivatives activity, suggests that we may be entering a new phase of market activity.
The 5% drop in BTC on the day of the lawsuits helped to boost the 30-day volatility slightly, but it remains shallow, in line with December 2022 levels.
Following BTC’s steady decline last week, the 7-day volatility trended lower, with yesterday’s 5% drop contributing little to raising the 7-day volatility.
Nonetheless, we have seen unmistakable evidence of resurfacing volatility in the past two weeks, as BTC’s trading range has broadened both to the upside, with prices above $28k, and to the downside, with BTC testing February highs of $25,200 yesterday. The expanded range indicates a more volatile situation in the future. The rapid drop and retest of February highs contributed to the fear and greed index’s first showing of fear since March 13.
The cryptocurrency market is highly connected. BTC movements are often mirrored by sharper changes in cryptocurrencies. In many ways, BTC is the lower beta crypto option and the undisputed market leader.
An important underlying market driver is openness. Leverage exacerbates volatility in the cryptocurrency market. If one wishes to be an active market participant, one should always pay close attention to open interest.