The digital asset industry has experienced a tumultuous week, with Bitcoin and Ethereum becoming safe havens.

In the past week, the digital asset industry has experienced the most impactful event of 2023 so far. Three cryptocurrency-friendly banks in the United States have collapsed one after another, triggering severe market fluctuations. However, the main reaction from investors seems to be a shift towards Bitcoin and Ethereum, the two major assets considered to require the least trust, in search of safety.

In just a few days, three major banks in the United States that serve the cryptocurrency industry either entered voluntary liquidation or were taken over by regulators. SilverGate announced voluntary liquidation and will fully return depositor funds. Silicon Valley Bank, the 16th largest bank in the U.S., was closed by the Federal Deposit Insurance Corporation and entered bankruptcy management, becoming the second largest bank failure in U.S. history. New York's Signature Bank has also been closed. It is expected that these three banks will return all deposits through the reserves they hold or the deposits guaranteed by regulators.

Due to many large digital asset companies and stablecoin issuers using these banks, the market was unstable over the weekend. In particular, the USDC issuer Circle held about $3.3 billion in cash at Silicon Valley Bank, which caused USDC to temporarily deviate from its peg to $1.

This event has several key impacts on the on-chain and broader market structure:

1. Multiple stablecoins decoupled from the 1 USD peg, and Tether (USDT) regained its dominant position.

2. The digital asset market has seen a net capital outflow, reflected in the liquidity of stablecoins, Bitcoin, and Ethereum.

3. Futures open interest reached a cyclical low, but trading volume increased. Speculative interest drove Bitcoin to rebound to $22,000, while Ether rose to $1,600.

4. The price of Bitcoin is trading between several widely followed technical analysis pricing models. After encountering resistance at the 200-week and 365-day moving averages (around $25,000) in February, it touched near the 200-day and 111-day moving averages (around $19,800) this week and then rebounded.

It is worth noting that this is the first time in history that the Bitcoin trading price has fallen below the 200-week moving average, marking a new phase for the market.

Since the collapse of LUNA-UST, this week has seen the first fluctuations in stablecoin prices, primarily due to concerns that USDC may lose some of its backing. USDC dropped to a low of $0.88, and DAI subsequently fell to $0.89. Gemini's GUSD and Paxos' USDP also traded slightly below the $1 peg, while BUSD and Tether experienced premium trading.

Tether traded at a premium of $1.01 to $1.03 for most of the weekend. Ironically, amid concerns that the heavily regulated U.S. banking sector could trigger broader impacts, Tether has been viewed as a safe haven.

The stability of DAI has come under scrutiny, as stablecoins have become its primary form of collateral. USDC accounts for approximately 55.5% of the direct collateral, and has a larger share in various liquidity positions, totaling about 63% of all collateral. This event has sparked discussions about the long-term implications for DAI, exposing its close ties to the traditional banking system.

Tether's market dominance has been structurally declining since mid-2020. However, with recent regulatory actions against BUSD and concerns related to USDC, Tether's dominance has rebounded to over 57.8%. USDC has maintained a dominance of 30% to 33% since October 2022, but the changes in supply are yet to be observed as the redemption window has reopened. BUSD's dominance has sharply declined from 16.6% in November to the current 6.8%.

In terms of capital flow, the combination of the realized caps of Bitcoin and Ethereum with the circulating supply of major stablecoins results in a total market value of approximately $677 billion, down about 20% from the peak a year ago. February saw the first net inflow of funds since April 2022, but last month experienced a reversal outflow of $5.97 billion, primarily due to stablecoin redemptions and realized losses in mainstream coins.

As news of bank failures spreads, investors are turning to Bitcoin and Ethereum for refuge. There has been a significant outflow of funds from trading platforms, with approximately 0.144% of Bitcoin and 0.325% of Ethereum being withdrawn from exchange reserves, indicating a preference for self-custody among investors. Last month, over $1.8 billion worth of Bitcoin and Ethereum flowed out of trading platforms.

In comparison, the two main stablecoins have a net inflow of 1.8 to 2.3 billion dollars per month into trading platforms. However, BUSD is flowing out of trading platforms at an astonishing rate of 6.8 billion dollars per month, which may indicate a certain degree of "stablecoin conversion."

In the futures market, the total amount of open contracts for the two main assets has dropped to a cyclical multi-year low. The notional value of Bitcoin futures positions is $7.75 billion, accounting for approximately 63% of the total open contracts. Trading volume has rebounded to the levels seen for the entire year of 2022, at around $58.2 billion per day.

This week's price fluctuations are partly due to the squeeze of long and short positions. When the sell-off reached $19,800, approximately $85 million in Bitcoin long positions were liquidated. The price then rebounded to over $22,000, and about $19 million in short positions were liquidated.

The financing rates in the perpetual swap market have reached extreme spot premium levels. Traders are paying annualized funding rates of -27.1% and -48.9% to short Bitcoin and Ethereum, respectively. The liquidation in the Ethereum futures market is even more severe, with over $48 million in shorts being liquidated as the market rebounded above $1600.

Overall, this week reinforced Satoshi Nakamoto's original intention of creating a trustless scarce digital asset. Despite challenges facing the traditional financial system, Bitcoin and Ethereum have shown potential as safe havens, attracting investors seeking security. However, the entire industry remains in uncharted waters, and future developments need to be closely monitored.