The cryptocurrency industry loses support from three major banks, Bitcoin and Ethereum become safe havens

After the most tumultuous week of 2023, the digital asset industry has lost three important banking partners in the United States. However, the main reaction from investors seems to be turning to Bitcoin and Ethereum, the two most decentralized mainstream assets, in search of safety.

In just a few days, three major banking institutions in the United States either voluntarily liquidated or were taken over by regulators, all of which had provided services to companies in the encryption industry. SilverGate announced voluntary liquidation and full repayment of depositor funds. The 16th largest bank in the U.S., Silicon Valley Bank, was taken over by the Federal Deposit Insurance Corporation, becoming the second largest bank failure in U.S. history. New York's Signature Bank also closed on March 12.

It is expected that the deposits of these three banks will be fully returned through the reserves held or guarantees from regulators. The involvement of many large digital asset companies and stablecoin issuers with these banks has led to increased market volatility over the weekend. In particular, the USDC issuer Circle holds about $3.3 billion in cash at Silicon Valley Bank, causing USDC to briefly deviate from its $1 peg.

This event has caused the following key impacts:

1. Multiple stablecoins have decoupled, and Tether has regained its dominant position.

2. The digital asset market has seen a net capital outflow, primarily reflected in stablecoins, Bitcoin, and Ethereum.

3. Despite the increase in trading volume, the futures open interest remains at a cyclical low. Speculative interest has driven Bitcoin to rebound to $22,000, while Ether has risen to $1,600.

4. Bitcoin prices fluctuate between multiple technical analysis pricing models. After encountering resistance around $25,000 in February at the 200-week and 365-day moving averages (, it rebounded this week after reaching approximately $19,800 at the 200-day and 111-day moving averages ).

It is worth noting that this is the first time in history that the Bitcoin trading price has fallen below the 200-week moving average, and from this perspective, the market is in uncharted territory.

Since the collapse of LUNA-UST, stablecoin price fluctuations have emerged this week for the first time, mainly due to market concerns about USDC losing some of its support. USDC once dropped to a low of $0.88, followed closely by DAI which fell to $0.89. Gemini's GUSD and Paxos' USDP also dipped slightly below the $1 peg, while BUSD and Tether experienced premium trading.

Especially Tether, which traded at a premium of $1.01 to $1.03 for most of the weekend. Ironically, amidst concerns that strict regulations in the U.S. banking industry could have broader impacts, Tether is seen as a safe haven.

For DAI, stablecoins have become the primary form of collateral, a trend that has been growing since mid-2020. USDC accounts for about 55.5% of direct collateral and also holds a significant share in various Uniswap liquidity positions, totaling approximately 63% of all collateral.

This event undoubtedly sparked discussions about the long-term impact of DAI. Although DAI claims to be a decentralized stablecoin, this incident indicates that the price of DAI is actually closely related to the traditional banking system through the collateral composition.

Tether has been structurally declining in its dominant position in the stablecoin market since mid-2020. However, following recent regulatory actions against BUSD and concerns related to USDC this week, Tether's dominance has rebounded to over 57.8%. USDC has maintained a dominant position of 30% to 33% since October 2022, but it remains to be seen whether supply will decrease with the redemption window reopening. BUSD has experienced a sharp decline in recent months, with its dominance dropping from 16.6% in November to the current 6.8%.

Estimating the real capital flow in the digital asset market can be quite complex, but typically capital mainly flows in through Bitcoin, Ethereum, or stablecoins. Therefore, the realized market capitalization of Bitcoin and Ethereum combined with the circulating supply of major stablecoins can provide a relatively reliable metric.

Currently, the total market value is approximately $677 billion, down about 20% from the historical high of $851 billion recorded a year ago. Bitcoin's dominance is 56.4%, Ethereum is at 24.5%, USDT, USDC, and BUSD together account for 17.9%, and the remaining 1.2% is Litecoin.

Based on the changes over 30 days, February marked the first net inflow of funds since April 2022, peaking at an increase of $5.8 billion per month, primarily led by Bitcoin and Ethereum. However, last month the market experienced a reversal outflow of $5.97 billion, of which 80% was due to stablecoin redemptions (mainly BUSD), and 20% came from realized losses of Bitcoin and Ethereum.

With the news of Silicon Valley Bank's collapse, investors are turning to Bitcoin and Ethereum for refuge. Major trading platforms have experienced significant outflows of funds. Approximately 0.144% of Bitcoin and 0.325% of Ethereum have been withdrawn from trading platform reserves, indicating a trend of self-custody similar to that after the FTX collapse.

Last month, over $1.8 billion worth of Bitcoin and Ethereum flowed out of trading platforms. Although the scale is not particularly large, the net withdrawals from trading platforms in the current tightening regulatory environment are still noteworthy, reflecting the level of investor confidence.

On the other hand, the two major stablecoins have a net inflow of 1.8 to 2.3 billion USD per month into trading platforms. Notably, BUSD has been flowing out of trading platforms at an astonishing rate of 6.8 billion USD per month, far outweighing this. Therefore, it is likely that a certain degree of "stablecoin conversion" is occurring.

Overall, the market's reaction to stablecoins, Bitcoin, and Ethereum seems to reflect a clear preference for trustless asset self-custody.

In the futures market, the total open interest for the two major assets has fallen to a cyclical multi-year low this week. The notional value of Bitcoin futures positions is $7.75 billion, accounting for approximately 63% of the total open interest.

Bitcoin's dominant position in futures trading volume is also around 60%, and the trading volume has rebounded after the FTX incident and the year-end lull. Currently, the total trading volume is about $58.2 billion per day, equivalent to the level of the entire year of 2022.

This week's price volatility is partly due to a series of forced liquidations of long and short positions. When the sell-off reached $19,800, approximately $85 million in Bitcoin long positions were liquidated. Subsequently, as the price rebounded above $22,000, about $19 million in short positions were liquidated.

Before this rebound, the funding rates in the perpetual swap market reached extreme spot premium levels. Traders paid annualized funding rates of -27.1% and -48.9% to short Bitcoin and Ethereum, respectively. The intensity of shorting Ethereum was also much greater, with the price difference between Bitcoin and Ethereum reaching 21.8%, the largest level since the FTX sell-off.

This has intensified the liquidation in the Ethereum futures market. Over $48 million in shorts were liquidated when the market rebounded above $1,600, which means that the notional value of forced liquidations is 2.5 times higher relative to Bitcoin. This indicates that the Ethereum market has recently been used more to express speculative interest, exacerbating volatility.

Overall, the events of this week have reinforced in many ways the reasons why Satoshi Nakamoto originally created a trustless scarce digital asset. The industry and even the global financial system are still in uncharted waters, and future developments remain to be seen.