IN THIS ISSUE

🪙 The stablecoin for Bitcoin DeFi
💰 USDh yield recap
📣 sBTC is here
📈 Weekly market review

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The Stablecoin for Bitcoin DeFi

USDh is being adopted as the stable for Bitcoin DeFi — as adoption continues, as with Bitflow’s recent RUNES AMM, USDh will continue to be the first pick to bring much needed stablecoin liquidity to the ecosystem.

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USDh Yield Recap

Market dips, USDh keeps earning with 20% APY in week #51.

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sBTC is Here

sBTC is here – Bitcoin DeFi just got even better! In just 24 hours, 560 sBTC were deployed, reaching 56% of the initial cap.

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Market Review

Bitcoin's uptrend faltered this week, falling from its all-time high (ATH) of $108,350 on Tuesday to $94,000 by Friday. Altcoins fared significantly worse, with the total crypto market cap, excluding Bitcoin, dropping 16% since last Friday. Unlike Bitcoin, Altcoins did not achieve new ATHs this week.

The moving averages (MA) in Figure 1 are:

• 7-Day MA: $101,394

• 30-Day MA: $98,480

• 180-Day MA: $70,359

• 360-Day MA: $64,723

• 200-Week MA: $42,347

Key moving averages, particularly the 7-day and 30-day MAs, often act as critical support during bull markets. However, Bitcoin has decisively broken below the 30-day MA, threatening the uptrend that has driven the market since the election. Over the next few weeks, the market will either establish a bottom or signal the end of this bull cycle.

There are key levels to watch:

• Bitcoin downside levels: $92,000, $90,000, $88,000, $74,000, $72,000, $70,000, $68,000

• Bitcoin upside levels: $99,000, $104,000, $106,000, $108,000

The retreat to $94,000 after sustaining above $100,000 for a week represents a failed breakout on the monthly timeframe. A recovery will likely take time, with hopes for renewed momentum by January.

The Bitcoin returns are as follows:

• 1 month: -0.23%

• 3 months: 48.26%

• 6 months: 48.68%

• 12 months: 114.37%

Bitcoin's annual return currently stands at 114.37%. Following this week's 10% price decline and the roll-off of December 2023 prices from the trailing 1-year calculation, the annual return has dropped by 17% compared to last week. Despite this decline, the current trailing 1-year return remains significantly above Bitcoin's historical average annual return of approximately 56% since 2015. This elevated return is expected to persist until February 2024, assuming no substantial rally occurs in the meantime.Net BTC ETF inflows totaled $1.163 billion since last Friday, with most gains occurring earlier in the week when Bitcoin prices were higher.

However, outflows of $671 million on Thursday, December 19th, reflected a shift in sentiment following the Fed's market-dampening remarks on Wednesday. Average daily flows for the week stood at $232.62 million. ETF flows continue to mirror market sentiment: bullish sentiment drove inflows earlier in the week, while shaken confidence at lower prices has now triggered outflows.

Historically, periods of above-average returns are often followed by below-average returns, and vice versa. Bitcoin saw a gradual downtrend from the launch of the BTC ETF in Q1 2024 until Donald Trump's reelection on November 5th. As the trailing 1-year return becomes indexed to a higher baseline, the current above-average return should not be interpreted as a market top in isolation. However, when considered alongside other metrics, it could provide valuable insights into potential long-term market tops and bottoms.

BTC ETF Flows

Net BTC ETF inflows totaled $1.163 billion since last Friday, with most gains occurring earlier in the week when Bitcoin prices were higher.

However, outflows of $671 million on Thursday, December 19th, reflected a shift in sentiment following the Fed's market-dampening remarks on Wednesday. Average daily flows for the week stood at $232.62 million. ETF flows continue to mirror market sentiment: bullish sentiment drove inflows earlier in the week, while shaken confidence at lower prices has now triggered outflows.

Volatility

Bitcoin's implied volatility (DVOL) currently stands at 63.27%, placing it in the 70th percentile of levels observed over the past year.DVOL had been steady around 58% while Bitcoin hovered near $100,000 but rose only 5% despite a 10% price drop over the past three days.

Market makers tend to benefit from prices reverting toward the center of a long-term range, as this moves their short option positions further out of the money. While a breakout above $100,000 on high volume could drive a sharp increase in DVOL, the current outlook suggests it will likely remain within its existing range.

Basis Spread

The basis spread, or the price of a futures contract over its spot price, is positive across all maturities. The average spread between maturities and spot fell from 16% last week to 13.31% this week.

The futures curve is in an inverted contango from the front month contract (December 27th) onward. The basis falls continuously from the front month to September 2025’s maturity in a smooth curve. There is about a 6.55% difference between the lowest and highest yielding maturities, down from 2% last week.

A steep downward sloping contango indicates that demand for closer maturities is outstripping supply and becoming detached from Bitcoin’s long run APR. Therefore, despite the fall in prices the market remains in a bullish posture. The more detached close maturities become the more bullish the market is on near term price action.

Bullish Bitcoin futures curves are typically special inverted contangos where the front month has the highest APR, and APR falls every maturity thereafter, but APR remains positive along the whole curve. This week’s futures curve is a good example. This is the most bullish curve in the short term because market makers use the front month to hedge short perp and spot positions during periods of high demand.

Funding Rates

Funding rates have remained surprisingly steady despite Bitcoin's 10% decline over the past three days.

Even on Deribit, where rates often skew more negative, funding has been mostly flat during down moves, surging only during relief rallies. This suggests that derivative traders were either positioned short ahead of the drop or remain confident enough to bid up perpetual swaps during signs of an upward reversal. Overall, the lack of panic indicates that traders view this macro-driven dip as a buying opportunity.

Macro

This week’s market action was heavily influenced by the Fed's bearish policy guidance from Wednesday’s Federal Open Market Committee (FOMC) meeting. Fed Chair Jerome Powell described this week’s rate cut as "a close call" and signaled only two 25-basis-point cuts in 2025—half the number implemented this year. The market, lulled into complacency by declining real goods inflation and multi-year lows in S&P 500 and U.S. Treasury volatility, was unprepared for such cautious guidance.

Trump has urged Congress to raise or remove the debt ceiling before his inauguration in January 2025, aiming to prevent a mid-year fiscal showdown and streamline his legislative agenda. While raising the debt ceiling is inflationary for real and financial assets, the short-term risk of a government shutdown could temporarily suppress money creation. Combined with the Fed’s guidance, these factors are expected to weigh on markets through January, but the bearish pressure is expected to be transitory, with recovery likely by late January or February.

Market volatility has surged in response. Equity implied volatility (VIX) spiked to 28.43 from 13.44 last week, while U.S. Treasury implied volatility rose modestly to 90.41 from a two-year low of 82.66. Bonds have absorbed some of the market panic, benefiting from a rotation out of equities as traders seek safety amid stock market volatility.

Sincerely,
The Hermetica Team