Sebastian Sinclair

After months of stagnation and false starts, the crypto market is gaining momentum.



Renewed optimism over the likely approval of a spot US ETF fueled last week’s rally in both bitcoin (<a href="https://blockworks.co/price/btc">BTC</a>) and ether (<a href="https://blockworks.co/price/eth">ETH</a>), kick-starting market volatility once more.



“The markets are constantly fluctuating, influenced largely by the sentiments of investors,” Konstantin Shulga, CEO and co-founder of Finery Markets told Blockworks.



“In recent times, we have observed a squeeze in call options for options sellers, while future indicators are becoming less optimistic as the market adjusts to the sudden rise of bitcoin.”



October was a turbulent month, with bitcoin&#8217;s price witnessing a significant 15% drive above $35,000 last week.



With this backdrop, Alex Thorn, Galaxy’s head of firm-wide research, believes more upward momentum could become a likely.



In a post on <a href="https://x.com/intangiblecoins/status/1718789234398556416?s=20">X</a>, Thorn articulated the possibility of another gamma squeeze for the world’s largest digital asset. A gamma squeeze forces options dealers to adjust spot exposure rapidly, often leading to volatility expansion. In the case of negative gamma, even as the price of bitcoin moves higher, dealers need to buy up bitcoin in large quantities to remain properly hedged.



“When dealers are short gamma and price moves up, or when they are long gamma and price moves down, they need to buy spot to stay delta neutral,” Thorn said.



Should the asset’s price reach the $35,750-$36,000 range, Thorn suggests options dealers would need to purchase an additional $20 million in spot bitcoin for every 1% upward move.&nbsp;



Although the impact of last week&#8217;s <a href="https://blockworks.co/news/bitcoin-volatility-short-squeeze-bullish-options">options expiries</a> could potentially dampen such explosiveness this time around, Thorn maintains that the scenario is still in play.



In addition to discussing the gamma squeeze, the Galaxy Research head examined a range of derived metrics based on on-chain data.&nbsp;



Thorn highlighted a widening divergence between the bitcoin supply held by long-term holders and that which has moved within the last 24 hours, indicating a decline in on-chain liquidity.&nbsp;



The 4-year rolling Z-score, a ratio of market price to realized price, suggests that bitcoin is not overvalued and remains in a structurally sound position, Thorn added.



A sparse cost basis between the current price and the $38,400-$39,100 range was observed by the research head with 83% of bitcoin’s supply having not moved since prices were lower than they are currently.



<h2 class="wp-block-heading">Divergence of opinion</h2>



Not all market observers concur, instead musing that the market would likely experience calmer activity following the excess froth from last week’s move.



“I think a further gamma squeeze higher is unlikely at this stage, Lachlan Feeney, founder and CEO of Labrys told Blockworks.&nbsp;&nbsp;



“Bitcoin is already trading higher than it typically would at this stage in a bull market. I expect the market to remain relatively subdued for a decent while longer, and don’t expect any significant moves higher any time soon.”



Le Shi, Head of Trading at Auros agreed saying Thorn’s comments while accurate in theory and when looked at independently, posed challenges when viewed in practical terms.&nbsp;



“There are two crucial contextual factors that could mitigate any potential impact,” Shi said.



The $20 million worth of purchases per 1% would not actually carry significant weight considering the liquidity of bitcoin, Shi noted, taking into account futures open interest and daily turnover.



“Thorn’s comments assume that those who hold long gamma positions do not engage in any hedging in the opposite direction during a rally,” the trading head continued.&nbsp;



“In reality, some portion of the aforementioned amounts will be offset by long gamma players engaging in hedging activities too.”



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Bitcoin momentum could fuel further short squeeze, says Galaxy exec

Bessie Liu

Swaap protocol has launched the v2 of its non-custodial market making infrastructure on Ethereum mainnet and <a href="https://blockworks.co/news/polygon-matic-crypto-upgrade" target="_blank" rel="noreferrer noopener">Polygon</a>.



As of May this year, the protocol had just over $2 million total value locked in its contracts, with majority of the tokens denominated in wETH, <a href="https://blockworks.co/price/wbtc" target="_blank" rel="noreferrer noopener">wBTC</a> and <a href="https://blockworks.co/price/usdc" target="_blank" rel="noreferrer noopener">USDC</a>. Swaap’s second version officially went live on July 10 and drew over $1 million in pool liquidity within the first day.



Balancer, the dominant protocol in the automated market maker (AMM) space, boasts $1.1 billion in total liquidity.



Swaap itself is a fork of Balancer v2, but with a twist. Swaap’s quotation model — which checks the recent sale price of any traded assets — is run off-chain, and there is an additional settlement module that has been added to run authenticity and performance checks on quotes.



For users, this means that it is cheaper to use Swaap than other market makers, as its AMM strategies are not dependent on on-chain networks such as Ethereum, Cyrille Pastour, co-CEO and cofounder of Swaap Labs told Blockworks. 



That’s a potentially notable development given the <a href="https://blockworks.co/news/exorbitant-eth-gas-fees-vmpx" target="_blank" rel="noreferrer noopener">long-standing issue of transaction costs</a> on networks like Ethereum, particularly during periods of heavy activity. 



Pastour said that running off-chain quotes improves the performance of market making strategies.&nbsp;



“Oracle data are updated several times per second compared to once every 27s at best on-chain,” Pastour said.&nbsp;



This means that it will be possible to run more complex computations and adapt to market conditions in real time.



Of course, there are always risks involved with off-chain management. Pastour acknowledged three in particular: corruption of price data sources, so-called “fat-finger” errors in models, and malicious actors who could seize control of the quotation module.&nbsp;



To mitigate these risks, Pastour said Swaap has a rigorous internal control system and follows strict cybersecurity practices. It also utilizes on-chain safeguards that help mitigate risks and limit LP exposure to unforeseen events.



“Swaap v2 employs several pioneering on-chain safeguards, including max imbalance, last look, and max drawdown mechanisms. These protections shield LP funds during extreme market conditions and potential malicious attacks,” he said.



Max imbalance relies on a mechanism that reverts trades which imbalance a pool, and LPs can easily check their imbalance risk exposure. Last look is a tool that is used to reject trades that have quotes which deviate too far from on-chain prices.&nbsp;



“Max drawdown is our most innovative mechanism,” Pastour said. “It’s a pool-level stop loss. If a trade causes a loss for LPs of more than x% of the pool value in a given time duration, the transaction will be reverted. The x% is an immutable parameter, deployed in the smart contract of the pool. It has been fixed at 4% every 24 hours for the first pools deployed on Swaap.”



Max drawdown is also used as a defense layer from exploitation of the trading function, Pastour explained. Setting a percentage limit on the total amount of funds an attacker can drain.&nbsp;



“These pioneering mechanisms enable v2 to ensure pool security even amid highly volatile market conditions. It provides robust defense against malicious attacks and extreme scenarios,”&nbsp; Pastour said.



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Upstart market maker Swaap goes live with new version on Ethereum, Polygon

David Canellis

FTX crumbled less than six months ago under the weight of sprawling corporate malfeasance, which amounted to billions of user dollars lost and waves of criminal charges against its executives.



The FTX dumpster fire — fanned by a series of tweets from Binance CEO Changpeng Zhao himself — burned particularly fiercely due to its cozy relationship with co-founder Sam Bankman-Fried’s market-making, venture investing sister firm Alameda Research.&nbsp;



Binance’s situation may be slightly different. FTX allegedly gave Alameda practically infinite <a href="https://www.sec.gov/news/press-release/2022-219">credit</a> to trade on the platform, funds which came from FTX users themselves.&nbsp;



The CFTC, in its recent indictment, hasn’t said Binance funneled funds to Zhao’s market makers in the same way.



Still, the apparent setup reeks of a familiar funk: Control the markets, own the market makers, then offer enough special privileges to render profiteering from users a sure thing.



<h2 class="wp-block-heading">So what did Binance do?</h2>



Binance has allegedly traded on its own exchange — against its own users — via around 300 so-called “house accounts,” which are directly or indirectly owned by CEO Changpeng Zhao.



Most of the CFTC’s charges relate to knowingly offering crypto derivatives (like perpetual swaps and futures) to US residents through Binance’s flagship international exchange.



But the agency also zeroed in on two of Zhao’s trading companies, Merit Peak and Sigma Chain, which serve as Binance market makers (supposedly neutral counterparties providing liquidity to keep order books running smoothly, earning profit from the spread).



The existence of these firms and their connections to Zhao were already known: Wall Street Journal reported in Feb. 2022 that the SEC was <a href="https://www.wsj.com/articles/sec-probes-trading-affiliates-of-crypto-giant-binances-u-s-arm-11644948162">probing</a> the two over Binance’s potential failure to disclose their relationship with the exchange and its founder to customers.



The CFTC’s lawsuit gives further insight into how Zhao’s market makers allegedly operate on Binance.



Starting no later than July 2019 and until today, Merit Peak (registered to the Cayman Islands alongside Binance’s flagship platform) entered into and settled over-the-counter trades with Binance customers.&nbsp;



Swiss-registered Sigma Chain, on the other hand, handled proprietary trading on various Binance markets, including derivatives (the CFTC also said Zhao traded on Binance with two other individual accounts).



Sigma Chain’s prop trading activity was directed by Binance’s “quant desk,” the CFTC said. Quantitative trading desks rely heavily on mathematical models, often automated, to make market decisions.



<h2 class="wp-block-heading">Zhao accounts allegedly outside of insider trading policy</h2>



The agency noted Binance does not disclose to users that Binance trades on its own markets. Binance’s US platform currently <a href="https://www.binance.us/terms-of-use">states</a> that the firm relies on third party market makers, some potentially related to the company, although it’s unclear when that wording was originally posted.



The CFTC said: “Consistent with its apparent attempt to keep its proprietary trading activity on its own markets top secret, Binance has refused to respond to Commission-issued investigative subpoenas seeking information concerning its proprietary trading activity on Binance, including transaction data and communications among the members of the Binance ‘quant desk.’”&nbsp;



The regulator claims that Binance does not include the trading activity of Merit Peak and Sigma Chain, its 300 house accounts nor Zhao’s individual accounts, in its anti-fraud or anti-manipulation surveillance.&nbsp;



Those accounts aren’t forced to abide by Binance’s insider trading policy debuted in January, either, with its house accounts allegedly completely exempt.



Welcome to crypto, where the money is made up and the conflicts of interest don’t matter — until the indictments roll in.



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<div class="wp-block-post-author-biography">David is an Editor based in the Netherlands focused on data-driven journalism. Previously, he wrote for TheNextWeb&#8217;s crypto vertical before launching Protos in 2021. He&#8217;s a reformed hardline Bitcoiner passionate about permissionless and decentralized networks. Contact David at david@blockworks.co</div>


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Start your day with top crypto insights from David Canellis and Katherine Ross. <a href="https://blockworks.co/newsletter/empire">Subscribe to the Empire newsletter</a>.



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