Crypto Weekly: Leverage is the language of crypto Crypto Weekly: Leverage is the language of crypto Crypto Weekly: Leverage is the language of crypto

Crypto Weekly: Leverage is the language of crypto

Summary:  On Friday, crypto long positions worth north of $500mn were liquidated, as fatigue spread in the crypto market. Not helping was speculation that exchanges may be forced to censor certain transactions on Ethereum in the future. Speaking of transactions, the demand for them on Bitcoin and Ethereum has decreased significantly, weakening the fundamentals of particularly Ethereum.


Traders standing in line to be liquidated

The crypto market, notably Ethereum, recovered partially in July and August until last week. From a low of 17,600 (BTCUSD) and 880 (ETHUSD) in June, Bitcoin and Ethereum surged to a local high of 25,200 and 2,030 on the 15th and 14th of August, respectively. Following new local highs, the market was seemingly becoming exhausted last week. Since then, Bitcoin has plunged by 15.6% to 21,270, whereas the Ethereum price has declined by 23.3% to 1,565. On mainly Friday, crypto derivative exchanges saw red. On this day, long positions were liquidated worth a combined $562mn in 24 hours. This is almost as much as the day in June, when Celsius halted withdrawals, even though the market movement to the downside was larger in June. This means that the crypto market has been extremely leveraged to ride the uptrend the past month and that party came to a halt on Friday. It seems that traders have particularly leveraged Ethereum trades going into the merge.

Can exchanges censor certain Ethereum transactions?

Two weeks ago, the US sanctioned the most used mixer on the Ethereum network called Tornado Cash. The latter has often been linked to money laundering; however, it was frequently used by private individuals to engage with the Ethereum network privately. The Tornado Cash protocol cannot by default be shut down, since it is a smart contract, so the sanctions involve that no US person or entity is allowed to engage with transactions originating from Tornado Cash. Afterward, speculation arose about what could possibly be next in line to be sanctioned. The ultimate sanction could be to censor certain Ethereum transactions, thus possibly shutting down the Tornado Cash protocol for good.

At the moment, it would not be possible for governments to directly censor such transactions, however, it might be possible for them, as soon as Ethereum adopts proof-of-stake instead of a proof-of-work framework in the middle of September, known as the merge. This is because the majority of the Ether staked, hence Ether used to verify transactions, is done through exchanges or other intermediaries by clients handing over their Ether to these companies for them to verify transactions on Ethereum. For instance, Coinbase handles close to 15% of the total amount of Ether staked. Governments can technically make Coinbase adhere to such sanctions by ensuring it does not verify transactions related to Tornado Cash on a network level. Without going into too many details, in our opinion, it is very unlikely that this will occur, both from a societal and technical point of view. Yet, if it in reality occurs, then everything in the industry is at risk since the main selling proposition is full decentralization without intermediaries. In case certain transactions are ruled out from the network, we need to look ourselves in the mirror and ask if this industry has then anything to offer at all. The speculation in this matter did arguably contribute negatively to the price development of Ethereum in the last week.

Brian Armstrong, Coinbase’s co-founder and CEO, commented on this on Twitter last week. Here, he said that Coinbase would possibly exit its staking operations if governments came to enforce the sanction of transactions on-chain, as Armstrong stated, “to focus on the bigger picture” by keeping Ethereum decentralized. If all staking providers do this, then it will presumably not be a problem, as the network will be kept online by solo stakers.

When prices drop, fees follow suit

For the majority of the year, the crypto prices have been on a downward trajectory. Transaction fees paid on particularly Bitcoin and Ethereum have followed suit. In November last year, Bitcoin generated around $500,000 - $1mn in fees daily, while Ethereum set at around $50mn - $80mn in transaction fees daily. Now, Bitcoin averages around $150,000 - $300,000 daily, while Ethereum sits at around $2mn - $3mn daily. This emphasizes that most activity on Bitcoin but primarily Ethereum is highly speculative and strictly linked to the prices of cryptocurrencies.

Source: Token Terminal

For Bitcoin, there are no direct consequences of lower total transaction fees in the near term. However, it might have consequences in the next decades, since the network might not be able to sufficiently compensate miners. For Ethereum, the lower transaction fees result in less Ether burned, effectively meaning less is removed from the supply. This makes the fundamentals of Ethereum weaker. For instance, Ethereum has for the past year burned 4.71 Ether per minute from transaction fees, whereas it has only managed to burn 0.89 Ether per minute in the past 30 days.

Bitcoin/USD - Source: Saxo Group
Ethereum/USD - Source: Saxo Group

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo Markets
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Support Centre
For existing clients, please click here to request support via the Support Centre.

Have a question about our products, platforms or services? Visit the Support Centre to find answers for our most frequently asked questions. If you are still unable to locate an answer to your question, you will also find contact details for your local Saxo office to speak with a representative.

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets UK Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.