Notes 5/12: Bitcoin Price, Ethereum Staking, and Withdrawing Ether from Lido

Bitcoin price rose yesterday after the release of positive consumer price inflation (CPI) data and sparked hopes that it was making another bid for the $30,000 mark. But the slight increase in its price turned out to be false narrative. A familiar one of declining prices took over shortly afterwards.

As of this writing, the cryptocurrency’s price is down by almost 4% from a day earlier to $26,425.28. On a weekly basis, the crash is even more steep at 9.1%.

Meanwhile, the shriveling up of liquidity in bitcoin’s ecosystem continues. Earlier this week, Jump Capital and Jane Street announced they were paring back operations in the United States. The two firms have acted as a market makers and liquidity providers to some of the biggest cryptocurrency projects and exchanges.

Perps and Price

While liquidity is one of the factors that accounts for outsize moves in the cryptocurrency’s price, another and, possibly more important one, is perpetual futures trading. Perpetual futures, or perps as crypto traders refer to them, do not have an expiry date and are funded by the position – Long or Short – with more demand on the platform.

Bitcoin is not suited for perpetual futures contracts as envisioned by economist Robert Shiller in his original thesis. However, cryptocurrency exchanges, never one to miss a profit opportunity, have adopted them all the same.     

According to research firm Kaiko, bitcoin perpetual futures are increasingly driving price action in spot markets. In a recent note, the firm stated that trading volumes for bitcoin perpetual futures at Binance, the world’s biggest cryptocurrency exchange by volume, is six times that of its spot markets. FTX, the cryptocurrency exchange that collapsed in spectacular fashion last year, offered perpetual futures contracts on its platform.

Flashing Red

Right now, bitcoin perpetual futures markets are flashing red. The overall trading volume for bitcoin futures declined to $931.4 billion in April from $1.31 trillion in the previous month. Binance dominates that figure, accounting for $525.82 billion of the overall figure. But it is unregulated and has been repeatedly embroiled in controversies because of its questionable business practices.

Another red flag is negative funding rates for bitcoin perps. A negative funding rate is equal to long positions dominating the short-term price outlook, meaning there is more pain, and a possible extinction, ahead for bitcoin price.

A Month of Ether Withdrawals

Today marks a month after Ethereum implemented the Shapella upgrade that enabled staking withdrawals of its native token, ether, from its platform. Proponents of the cryptocurrency claimed that the upgrade would convert ether into a Wall Street asset. Based on available data, however, the overall outlook for staking and ether is gloomy. Regulatory action had added the threat of extinction to the program and its token.

Ether’s Wall Street Asset Story

According to research firm Messari, 320,000 more ether was withdrawn than deposited in the first month after the upgrade.

In the initial days, primarily rewards were withdrawn. The tides turned soon after and taking out of principal amounts became more common, meaning investors completely exited Ethereum’s ecosystem after collecting their staking rewards.

Ether prices were expected to rally after the upgrade as its supply deflated and investors flocked to staking platforms in anticipation of juicy reward rates. Even though ether supply has fallen by roughly 154,552 in the last month, investors are not buying the promise of future rewards and utility for the cryptocurrency. As of this writing, it is down by 2%, to $1768.69, from a day earlier. On a monthly basis, the token is down by 8%.

A Meme Coin Hysteria

The absence of investors and declining liquidity has not affected profit taking on the platform. A crafted meme coin hysteria this past Sunday caused congestion in its network and inflated fees to commit transactions on its blockchain.  

The combination of manufactured demand for a worthless coin and fewer ether was successful in manipulating Ethereum’s staking algorithm and its rewards rate exploded. On Sunday, the blockchain was offering an 8.8% annual percentage rate (APR), more than double its rate a month earlier, to stake ether.  

High rates mean more rewards and, so, validators in Ethereum’s network are raking in the moolah. The blockchain dispensed 28,373 ETH, worth roughly $52 million at current prices, in the last week.

Not surprisingly, reports claim that staking deposits have multiplied since Sunday. [It is impossible to verify their claims]. More validators have come online, and the amount of staked ether has risen by roughly 0.5% to18 million, as of this writing.   

Nuances In the Narrative

There is more nuance to this narrative, however. The amount of staked ether had declined from 18.04 million to 17.97 million after the Shapella upgrade. The slight bump in numbers in recent days has only brought back staked ether numbers to pre-Shapella levels.

Those numbers are important within the context of analyzing overall demand for Ethereum’s overall staking program. Recent events are contrivances to mint rewards. This, and the practice of dubious strategies like Maximal Extractable Value (MEV), is unlikely to withstand scrutiny from regulators.

Withdrawing Lido’s Ether

Any analysis of Ethereum’s staking program is incomplete without mention of Lido, the biggest platform for staked ether. As of this writing, it has 11.6 million staked ethers, or roughly 65% of the total staked amount, on its platform and is offering a rewards rate of 7%.  

Lido generates yields from magic beans that, sometimes, surpass those offered on Ethereum itself. Most importantly, it is yet to begin withdrawals from its platform even though Ethereum’s developer community gave the go-ahead to begin withdrawals for all platforms on April 12. Withdrawals from Lido will be the real test of Ethereum’s staking program and ether’s staying power.

Earlier, Lido said Eth stakers could expect to begin withdrawals “no sooner than early May.” It is the second week of May and there is no communication from the platform about withdrawals.

A Sham Audit

Lido claims that it is conducting security audits for the launch of version 2 of its platform. Its claim is surprising since news about the Shapella upgrade has been doing the rounds since last November. Other staking services like Coinbase and Kraken went ahead and conducted their ‘audits’ to enable withdrawals immediately after April 12. Lido’s security audit itself is a cursory one to test code for withdrawals. The document does not list a single new feature or enhancement for a revised “version” of the platform.

Investors in the service seem to have caught onto its actions and their sale of its governance token, LDO, is telling a story that is different from the official one. In any case, even if Lido survives after a shakedown of crypto staking programs by regulators, its inefficiency in processing withdrawals will ensure that there will be no customers for its business.

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