Guess who may not be fans of the blazing Ethereum-based gaming platform Axie Infinity?
It’s crypto traders – surprising given that AXS, the governance token of Axie Infinity, has logged a year-to-date price return of over 7,000%, compared with bitcoin’s roughly 33% and ether’s 212%, according to Messari.
This trader bearishness could affect the price of the AXS token despite Axie Infinity being a blockchain-based project with solid fundamentals and great revenue models.
“The euphoric-herd mentality pushed the valuation to extremes and, as with any overcrowded trade, once the unwind takes place the price swings will be extremely volatile,” Denis Vinokourov, head of research at London-based quantitative finance management firm Synergia Capital, said. “The problem is market timing – timing the top of the market – is notoriously difficult.”
Trading data from crypto exchanges shows futures traders have been aggressively taking short positions on AXS, betting the token’s price bull run will face downward pressure soon, as the perpetual futures market for AXS has consistently seen negative funding rates.
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The funding rate refers to the cost of holding long/short positions in one crypto’s perpetuals (futures with no expiry) market. The metric is used by exchanges offering perpetuals to balance the market and guide perpetual prices toward the spot price. A positive funding rate means longs are paying shorts to keep the position open, as the market is skewed bullish. A negative funding rate, meanwhile, implies a bearish sentiment towards the token associated with the perpetuals.
The funding rates for AXS perpetuals on the two major crypto exchanges offering such products, FTX and Binance, have been negative. At the time of writing, data from FTX shows the one-hour average annualized funding rate for AXS perpetuals was at -42.92%, while the eight-hour-basis funding rate of the AXS/USDT perpetuals on Binance has been negative for at least 14 days.
This bearish take by crypto traders looks odd as Axie Infinity, the Ethereum-based trading and battling game, has received much positive reaction from the market. The project has also quickly become the top protocol on the Ethereum blockchain by revenue.
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Data from Token Terminal shows that Axie Infinity has logged the highest revenue in the past 30 days among all blockchain-based protocols, with roughly $148.7 million, only behind Ethereum blockchain itself, which is at $172.8 million.
Axie Infinity “is a company with a CEO, a parent company with privately owned equity, a real business model and rapidly growing revenues, all of which existed prior to Axie issuing its AXS token,” Jeff Dorman, chief investment officer at Los Angeles-based investment management firm Arca, wrote in his blog post dated July 12. “The token was issued to help bootstrap the growth of the company, and almost every customer and fan of the game had a chance to buy this token in the early days of its growth.”
The AXS token has also recovered well from the broader market sell-off on May 19, according to data from TradingView of Binance’s AXS/USDT pair.
Analysts said the difference in thinking between crypto traders looking at AXS and those hyped by the Axie Infinity project is not unexpected, especially after the May market crash. That’s because traders tend to take more aggressive trading strategies, hoping to maximize the potential returns.
“We just witnessed one of the most brutal crashes in crypto history,” Ashwath Balakrishnan, associate at blockchain research firm Delphi Digital, said. “Honestly, everyone was in disbelief at the beginning of this month when AXS started pumping. A lot of traders thought it was just a random market movement.”
Having missed out several price tops of AXS, crypto traders are trying to balance their “disbelief” that AXS has grown so rapidly with a “trying-to-make-it-all-back” mindset, according to Balakrishnan.
“When something goes parabolic, you have a large faction of people trying to short the top, so they start shorting on every new high,” Balakrishnan said. “And given this happened after people incurred losses or lost some of their unrealized profits, the stakes were higher for them and they shorted more aggressively.”
Institutions versus retail investors
Lennix Lai, director of financial markets at crypto exchange OKEx, also said that – based on the relatively balanced long and short ratio between AXS active buying volume and active selling volume on Binance, FTX and OKEx – it’s also possible that more institutional traders are taking shorting positions on AXS than retail traders.
“When there are more long accounts than short accounts, the funding would be negative because long accounts belong to retailers, and short accounts belong to institutional clients who hedge their funds,” Lai said.
Unlike Synergia Capital’s Vinokourov, who said the negative funding rate could lead to “unpredictable swings,” Lai said retail traders who are taking long positions can help AXS continue its rally.
“We do anticipate a significant response from retailers, as (Axie Infinity) is a project driven by consumers,” Lai said. “Even if a fund has a few short accounts, (AXS) may still outperform with many long accounts, resulting in a negative funding rate with a positive long-short ratio.”
OKEx launched trading products, including AXS margin, savings and USDT-margined perpetuals on Wednesday, Lai said.
But without further data partly because the market is still “nascent,” Vinokourov said that it is also hard to know whether Axie Infinity would continue to generate revenue at the current high level.
Market participants “will not hesitate to switch from one hot toy to another – no different to the yield farming craze earlier in the year,” he said.