IN THIS ISSUE

🎄 Hermetica holiday thank you
🪙 sBTC milestone
💰 USDh yield recap
📈 Weekly market review

Like what you see? Join our exclusive, ever-growing community on Discord and take part in future product launches:

Hermetica Holiday Thank You

2024 has been a monumental year for Hermetica, and it’s all thanks to you — our incredible community of supporters.

As we celebrate the year’s milestones, we want to share our gratitude for:

2025 promises to be even bigger! Stay connected by following us on X to stay up to date on what’s to come.

sBTC Milestone

Stacks DeFi is growing rapidly, with the initial 1,000 sBTC deposit cap reached in just 82 hours.

Each sBTC represents new liquidity flowing into Stacks, improving DeFi for all of us.

Sign up for notifications to be ready when more sBTC becomes available for minting!

USDh Yield Recap

We got you 17% APY for Christmas.

Make it a gift that keeps giving — stake USDh to start earning.

Market Review

Bitcoin hit an all-time high (ATH) of $108,350 on Tuesday, December 17th, before consolidating between $94,000 and $98,000. In contrast, altcoins have underperformed significantly over the past month. The total crypto market cap, excluding Bitcoin, peaked on December 7th—two weeks prior to Bitcoin's ATH—and has since declined by 17.4%, compared to Bitcoin's 11.5% drawdown.

The moving averages (MA) in Figure 1 are:

• 7-Day MA: $96,572

• 30-Day MA: $98,686

• 180-Day MA: $71,753

• 360-Day MA: $65,774

• 200-Week MA: $42,576

Moving averages, particularly the 7-day and 30-day MAs, often act as critical support during bull markets. Last week, Bitcoin's price broke below both the 7-day and 30-day MAs, threatening the bullish trend. Compounding the bearish signals, the 7-day MA crossed below the 30-day MA this week for the first time since October, further dampening market sentiment. Holiday seasonality has also contributed to reduced volume and liquidity.

The market's resilience will likely be tested in the first three weeks of the new year, as funds undertake major portfolio rotations. Bitcoin could benefit from these inflows, potentially resuming the bull market by mid-January. However, if no recovery materializes, the bull market may remain dormant for several months.

There are several key levels to watch. The Bitcoin downside levels are $94,000, $92,000, $90,000, $88,000, $74,000, $72,000, $70,000, or $68,000. The upside levels are $98,000, $99,000, $104,000, $106,000, or $108,000.

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 124.59%, although trailing annual returns have flattened since the start of December. Historically, Bitcoin’s average annual return since 2015 has been approximately 56%, placing the current 1-year return well above average. This elevated return is expected to persist until February 2024, assuming no significant rallies occur in the interim.

Periods of above-average returns often precede phases of below-average performance, and vice versa. Following the launch of the BTC ETF in Q1 2024, Bitcoin entered a gradual downtrend that continued until Donald Trump's reelection on November 5th. While the current elevated return reflects indexing to a higher starting price, it should not, on its own, be interpreted as a market top. However, when combined with other metrics, it may offer valuable insights into potential long-term market tops and bottoms.

BTC ETF Flows

Net inflows were subdued this week at $226.5 million, largely due to markets being closed for Christmas Day on Wednesday. Flows are expected to remain low through January 6th, the first full trading week after New Year’s. With New Year’s Day falling next Wednesday and markets closed, activity is likely to stay muted in the interim.

Volatility

Bitcoin’s implied volatility (DVOL) currently stands at 62.07%, placing it in the 78th percentile relative to the past year. Since mid-November, DVOL has been consolidating in a range between 55% and 65%.

Notably, DVOL increased by only 5% last week, despite Bitcoin's price dropping more than 10% in just three days. This muted response suggests that market makers, who often benefit when prices revert to the center of a long-term range, have maintained stable positioning as their short options move further out of the money.

DVOL is likely to remain within its current range unless Bitcoin breaks above $100,000 on high volume, which could trigger a significant spike in implied volatility.

Basis Spread

The basis spread, or the price of a futures contract over its spot price, is positive across all maturities. The average basis spread fell from 13.31% last week to 11.11% this week.

The futures curve is in an inverted contango from the front week contract (January 3rd) onward. The curve dips sharply from front week to front month and then largely flat over the rest of the curve. There is about a 1.82% difference between the lowest and highest yielding maturities, down from 6.55% 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. The more detached close maturities become the more bullish the market is on near term price action.

Despite the fall in prices the market remains in a bullish/neutral posture. Previous weeks had significantly more bullish future’s curves, but this week’s flatter curve still indicates that there is demand for future’s leverage.

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. The future’s curve from two weeks ago is a good example of a bullish curve. Price was rallying too when this curve was recorded only to be cut short later by the FOMC rate decision.

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.

Macro

The Federal Reserve’s bearish policy guidance from the December 18th Federal Open Market Committee (FOMC) meeting has set the tone for Bitcoin’s price action over the past two weeks. During the meeting, Jerome Powell noted that the December rate cut was "a close call" and indicated that future cuts might be limited. The Fed’s guidance pointed to only two 25-basis-point rate cuts next year—half the number implemented this year.

In the lead-up to the rate decision, markets became complacent, as evidenced by multi-year lows in S&P 500 and U.S. Treasury volatility just two weeks prior. However, traders overcorrected their expectations following the FOMC announcement, triggering a surge in market volatility. Implied volatility in equities (VIX) spiked from a low of 13.44 to a high of 28.43 before retreating this week to pre-FOMC levels of 15.41. Meanwhile, U.S. Treasury implied volatility has continued to climb, rising from a two-year low of 82.66 last week to 95.19.

The divergence between bond and equity volatility likely reflects traders reallocating to equities after a brief rush into bonds following the FOMC news. This dynamic underscores ongoing uncertainty in the macroeconomic environment.

Sincerely,
The Hermetica Team