How did the debt ceiling standoff affect the crypto market in May?

Markets have tumbled in fear of a default crisis in the U.S.; President Joe Biden and top congressional Republican Kevin McCarthy are closing in on a deal raising the government’s $31.4 trillion debt ceiling for two years while capping spending on most items. Regulatory headwinds pushed two of the world’s largest market makers to withdraw from trading digital assets in the U.S. Falling by 5% over the past month, Bitcoin had its share of speculation around its network’s soaring transaction fees, signaling unprecedented congestion. On the upside, Lido was the biggest winner of this month, increasing by 6%. Ethereum’s upgrade unlocking staked ETH has revitalized investor confidence in the cryptoasset. It also boosted demand for protocols like Lido, which saw a 6% increase in net new assets; despite Celsius withdrawing $800M right after the liquidity event. Our dashboards show that Lido processed withdrawals flawlessly to avoid putting additional stress on the activation or exit queue using a buffer of ETH from deposits and rewards.

Figure 1: Price and TVL Development of Major Crypto Sectors

Source: 21shares, Coingecko, DeFi Llama. Data as of May 30 close.

Key takeaways from this report

Bitcoin trials smart-contract functionality while inspiring legacy networks to continue innovating, and Avalanche launches a no-code launchpad to create Web3 applications.

• Lido V2 goes live, enabling withdrawals, Galaxy Digital executes its first on-chain options trade and Tether holds 2% in BTC and continues allocating 15% of net profits to BTC after a strong Q1.

• Another try at borrowing against NFTs, as marketplace Blur launches NFT lending protocol and Binance launches NFT lending feature with zero gas fees.

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Spot and Derivatives Markets

Figure 2: Total Liquidations

Source: Coinglass

On May 10, we saw over $100 million in liquidations after a pseudonymous source tweeted false information alleging that Bitcoin wallets controlled by the U.S. government were on the move. Most positions liquidated were long, as BTC dropped 5% from ~$28,200 to ~ $26,800 in less than an hour (see Figure 2). The market’s overreaction was entirely avoidable. We built a dashboard over two months ago that anyone can access to monitor the U.S. government-controlled wallets in real time and in fact, the assets remained in the wallets.

On-chain Indicators

Figure 3: Percentage of Ethereum in Exchanges

Source: Glassnode

The amount of ETH held on centralized exchanges reached its lowest point in seven years, accounting for only 14% of the total circulating supply. This significant decrease can be traced back to November, when users swiftly withdrew their assets from crypto exchanges due to the collapse of FTX. The trend regained momentum in March, triggered by several banking failures resulting in a sense of distrust in the financial markets. As such, non-custodial staking solutions such as Lido and Rocketpool, benefited from the assets exodus from custodial exchanges.

Next Month’s Calendar

Source: 21shares, Forex Factory, CoinMarketCap

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Research Newsletter

Each week the 21Shares Research team will publish our data-driven insights into the crypto asset world through this newsletter. Please direct any comments, questions, and words of feedback to research@21shares.com

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The information provided does not constitute a prospectus or other offering material and does not contain or constitute an offer to sell or a solicitation of any offer to buy securities in any jurisdiction. Some of the information published herein may contain forward-looking statements. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties and that actual results may differ materially from those in the forward-looking statements as a result of various factors. The information contained herein may not be considered as economic, legal, tax or other advice and users are cautioned to base investment decisions or other decisions solely on the content hereof.