Bitcoin price edged past the $31,000 mark once again this morning. As of this writing, it is trading at $31,040.82, up 2% from its price yesterday. There are no fresh catalysts to pump its price further.
But it might be preparing for a big move if derivatives are signals for future price action. The open interest in bitcoin options is near an all time-high of $1.59 billion at the Chicago Mercantile Exchange (CME).
Investors have been fooled earlier by options expiry for bitcoin futures. But those expirations took place at unregulated exchanges, where trading volumes and products are suspect. CME is a regulated venue, meaning investors betting on its platform are playing for real money.
Ether Open Interest Reaches Record Highs
Ethereum’s native token, ether, is also poised similarly. The open interest in ether has reached an all-time high of $254 million. As with bitcoin, there is no logical reason – a rarity in crypto investing – for their enthusiasm.
The Shapella upgrade, which enabled withdrawals of ether from Ethereum and was supposed to convert it into ultrasound money, turned out to be a clunky and inefficient affair that has a waiting period of several weeks, if not months. Ether also remains as worthless as ever.
The direction of open interests – whether they are bullish or bearish – in both cryptocurrencies remains a mystery.
A hint can be found to investor thinking can be found at spot exchanges. According to research firm Kaiko, trading volumes at spot exchanges fell to their lowest volumes since 2020 in the second quarter. At Binance, the crypto world’s biggest exchange by market cap, they fell by 70%. Coinbase, OKX, Kraken, and Huobi all registered declines of more than 50% in the same time frame.
Restaking Again
Scope creep is a common affliction in software projects. That is when developers, in an effort to please multiple constituencies, incorporate far too many bells and whistles into their application and confuse the user. Microsoft Office is an example. Ethereum is undergoing its own version of scope creep with restaking.
Even though restaking clearly compromises Ethereum’s security and attempts to financialize a worthless asset, ether, into a yield-generating security, Ethereum’s developers still remain unconvinced. A recent panel, featuring a very reluctant Vitalik Buterin, again discussed the restaking “dilemma”. None of the panelists, except Buterin, have staked ether. Even Buterin has also staked a very small amount.
This is not surprising since Ethereum staking was and will remain an institutional game. But that didn’t stop Justin Drake, a researcher at Ethereum Foundation, from expressing concern about decentralization because solo stakers will suffer from restaking. [Drake has never staked ether].
There was quite a bit of improvising as well. Responding to the questions about the danger of handing over validator slashing rights to third parties, the chief executive officer of EigenLayer, a restaking startup, said the protocol will have a “social layer” whose only role will be to “veto” slashing positions. Shortly afterwards, he suggested that the social layer will be eliminated in “one or two years” when restaking providers become trusted parties.
One can go on and on about the problems with restaking and the panel discussion. But that would be a waste of effort. And energy.
Future of Cryptocurrency Exchanges
Appearing on CoinDesk’s show this morning, former FTX chief operating officer (COO) Brett Harrison attempted to predict the future of cryptocurrency exchanges. He said there will be three types of exchanges.
The first type will be vertically integrated, like Coinbase, that combines multiple activities related to trading and custody into a single unit. Decentralized exchanges or DEXs will comprise the second category. DEXs are supposed to enable direct trading between two parties without an intermediary. A third type of crypto exchange, in Harrison’s telling, will be the regulated entity that hews to the fabric of trading securities regulations and distributes activities between various actors.
Do the current trading ecosystem and regulations have the bandwidth to support three types of exchanges? Not really.
The conceit of crypto exchanges conducting activities under a single roof is that it is a requirement for instant settlement. In fact, instant settlement is not restricted to crypto exchanges. The unending spiral of scandals in crypto, the latest of which involved a custodian no less, has also highlighted problems inherent in the vertical integration espoused by crypto.
The so-called decentralized exchanges are also anything but decentralized. They are controlled by entities and developers and have worthless governance tokens that provide a cut of the transaction fees charged by the exchange. The tokens are also subject to volatile price swings, much like the rest of crypto, to benefit their holders. It is unlikely that they will pass regulatory tests.
That leaves us with regulated crypto exchanges that function in much the same way as traditional financial markets. In other words, the future of cryptocurrency exchanges lies in the market structure of traditional finance.