IN THIS ISSUE

🎉 Hermetica Points are live
🎥 Recap of Hermetica Hangout #7: Arch Network
💰 USDh yield recap
📈 Weekly market review

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Hermetica Points are Live

The time has come: Hermetica Points are LIVE! Hold, stake, and use USDh in Bitcoin DeFi to earn points and climb the leaderboard.

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Recap of Hermetica Hangout #7: Arch Network

Did you miss Hermetica Hangout #7 with Arch Network? Here’s a quick recap of what we talked about on Tuesday:

Listen to the recording below to get the full details of what Arch is building!

USDh Yield Recap

We're turning the final corner in week #33. This week, sUSDh holders earned 6% APY.

Don’t miss out, stake USDh today to earn points and up to 25% APY.

Market Review

Bitcoin and most altcoins experienced a dramatic drop last week, triggered by macroeconomic turbulence from the collapse of the Yen-dollar carry trade. Since the crash and subsequent partial recovery, Bitcoin has been in a holding pattern, maintaining a price around $58,000.

Bitcoin's price is currently in a downtrend, trading below several key moving averages (MAs): the 6-month MA at $64,257, the 5-week MA at $62,674, and the 1-month MA at $62,658.

These MAs, clustered around $63,000, will likely act as significant resistance to any upward price movement. Previously, these averages served as support; however, once Bitcoin’s price fell below the averages, it quickly dropped to the next major support zone of $49,000-$50,000. Until the price climbs back above these MAs, the medium-term downtrend is expected to continue.

The price remains above the 1-year and 200-week MAs, currently at $50,311 and $38,027, respectively. The 1-year MA provided support during the recent crash, and many traders will be watching this level closely, ready to buy if the price revisits it.

Should the price continue to increase, we can estimate the upside price levels where the price is likely to meet resistance: $60,000, $63,000, $64,000, $68,000, $70,000, $72,000, and $74,000.

However, if price momentum does not recover, we estimate support levels to be at: $58,000, $55,000, and $49,000.

In other news, Justin Sun of Tron network is buying BitGo’s Wrapped Bitcoin business. As a result, protocols on Ethereum, such as MakerDao, are planning to delist wBTC from their protocol. This development will cause Bitcoin to lose most utility on altcoin networks. However, this bodes well for Stacks and other Bitcoin side chains with native wrapped Bitcoin alternatives.

BTC ETF Flows

Net BTC ETF flows since last Friday were negative, with a total of -$93.2 million.

Average daily outflows were $18.64 million. The median daily outflow stands at $11.1 million.

Volatility

Bitcoin's implied volatility (DVOL) is currently at 54.27%, placing it in the 50.4th percentile.

DVOL experienced a significant spike last Monday amid the price crash, briefly reaching a ten-month high of 92.73. During the crash, Deribit market makers temporarily ceased trading, making it difficult to buy or sell options in large volumes for a few hours.

However, as the price rebounded above $53,000, re-entering the previously established multi-month range, market makers returned and restored liquidity to the options market. Consequently, DVOL quickly reverted to its earlier levels. Although DVOL briefly broke its long-term downtrend, it has since settled back into that trend.

Basis Spread

The basis spread, or the price of a futures contract over its spot price, is positive across all maturities, but the short end of the curve has fallen in the last week.

The futures curve is in normal contango with front month (August 30th) APR lower than all other maturities, including front week (August 23rd). The basis rises in the back months (September 27th & December 27th) and then flattens out there after. This yield curve is positively sloped. Front maturities need to rise for Bitcoin to be in the optimal bullish curve.

Bullish Bitcoin futures curves are typically special contangos (Figure 8) where front month has the highest APR, and APR falls every maturity thereafter, but APR is positive along the whole curve.

This is the most bullish curve in the short term because market makers use front month as a substitute for perps and spot during periods of high demand. This week’s curve looks very similar to the optimally bullish curve if we remove front month which expires in a week.

Macro

The macroeconomic landscape is still reeling from the collapse of the Yen-Dollar and Yen-Nikkei carry trades last Monday. Since January 2021, the Japanese Yen has been in a downtrend against the US dollar, fueled by an interest rate carry trade between the two currencies and a secondary carry trade involving the weakening Yen and the Japanese stock market.

For context, an interest rate carry trade involves borrowing in a currency with a low interest rate and investing in a currency with a higher interest rate to profit from the interest rate differential. Traders engaging in carry trades also benefit from unrealized gains as the value of the borrowed currency declines while the value of the purchased currency appreciates. These unrealized gains are the primary source of profit in the second stock-currency carry trade.

When Japanese banks lent Yen to currency carry traders, they increased the Yen supply, which these traders then sold in international markets. This surplus Yen ended up inflating the value of the Nikkei and other Japanese financial assets, as well as contributing to inflation in the real economy. With an abundance of Yen, the nominal value of the Japanese stock market had to rise just to maintain the real value of Japanese stocks. Consequently, over the past three years, the Nikkei has experienced its largest rally since the 1980s.

These carry trades were a result of the Bank of Japan's (BOJ) extremely dovish interest rate policy, which has kept rates at zero for decades. This policy, coupled with the US Federal Reserve's dramatic rate increases from 0% to 5.25% since late 2021, created an interest rate differential that encouraged extensive borrowing of Yen for investment in US Treasury bonds and other securities.

However, the carry trade began to unravel when the BOJ announced on July 31st that it would start raising interest rates to strengthen the Yen and address real goods inflation in Japan. Recognizing a trend shift, traders rushed to sell their securities and lock in the unrealized gains from the carry trades. This surge in demand for Yen led to a liquidation in the Nikkei and cross-currency markets, resulting in the forced liquidation of many traders’ Nikkei stock portfolios and causing the index to decline by as much as 15% in a single day.

The Nikkei has since stabilized at its pre-crash level, and the Yen has temporarily halted its rise.

S&P 500 implied volatility currently stands at 15.22, while US Treasury implied volatility is at 103.74.

Equity and bond IV exploded higher during the Yen carry trade collapse. Equity and bond vol reached highs of 65.86 and 121.25, respectively.

Sincerely,
The Hermetica Team