1/ BTC edged above the 50k level yesterday in Asia morning, a key level that BTC has not closed above since the crash on 12 May.
2/ The catalyst for the break higher was the same pattern of option flow that has been consistently pushing prices higher in the last few weeks. Around 7am in Asia, the market was hit for a large amount of call options rapidly in multiple clips, โdrive byโ style
3/ Weโve been bullish towards the 50k price level in BTC but were unsure after. We now maintain our bullish bias against the 40k support level in BTC. These are our reasons:
- Possibility of Fed taper risk pushed from September to December..
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a. The Fedโs Jackson Hole Symposium held on Thursday and Friday this week has been turned into a virtual summit. We are doubtful that the Fed would signal a taper at this event.
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b. Governor Brainard's latest dovish pivot to become Fed chair is likely to raise enough questions within the FOMC to delay their decision by a quarter (to December).
With that said, we will be watching the US CPI (14 Sep) and FOMC (23 Sep) events very closely
6/
- Headline regulatory risk exhausted in the near-term. We expect any significant crypto-related regulatory decisions to come only towards Q1 2022, particularly anything from the Senate Banking Committee & the SEC
- Rally driven by real demand.. Sharp rallies in crypto..
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.. are usually accompanied by a spike in funding rates (in perpetual swaps) and stark contango (premium in the futures) due to frenzied deployment of leverage by speculators. This is not sustainable and typically precede severe corrections like the dip we saw in Q1 2021
8/ In spite of today's mini funding spike on the rally (up to 20% annualized) funding rates & future premiums in both BTC & ETH continue to be relatively low & muted. This means most of the rally has been driven by demand in physical spot rather than from leveraged speculators.
9/ In spite of the sharp rally the mkt doesn't show signs of overheating or overextension. Not yet at least.
However our bullishness comes with some moderation & we don't expect more exponential upside breaks like what we saw at the end of 2020 into 2021. These are our reasons:
10/
- No signs of stress in vols. We continued to see significant call buying in the past week. However, the vol market has absorbed this surprisingly well with implied vol continuing its decline, especially in the long-end of the curve..
11/ ..We along with other vol market makers have been happy to sell decent amounts of vega into this rally. The calmness in vols is not consistent with crazy breakout behaviour.
- No signs of stress in spot or forwards. In spite of the break of 50k..
12/ ..the market does not look like itโs caught short. It is usually short covering that causes rapid upside breaks. The failure to close the day above 50k also shows some weakness in demand. At the same time, the forward curve remains flat
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- GBTC continues to trade at a large discount to spot: -12% . The bull run from last year happened while GBTC was trading with a strong premium over spot. As a proxy for US interest, GBTC should at least trade at par if we are to expect any strong follow through in spot.
14/ Overall, we are constructive on BTC and ETH price but we expect some consolidation here. 51,110 BTCUSD is the 61.8% retracement from the ATH to June's 28,800 low - we expect good resistance at this level..
15/ ..A consolidation triangle in the RSI also reflects the hesitancy in the market despite the positive price action.
The clear trade for us here is short vols as we expect spot to be sticky around the 48-51k level. This would see further vol compression across the curve..
16/ ..More specifically, we are short both Vega and Gamma here.
Implieds are still relatively elevated from the spike the week before so there are great premiums to be extracted while spot trades in this tight range.
1/ This week, ETHBTC cross started moving towards our 0.0850 target level [view from 03 Aug Market Update
The outsized move higher in ETHUSD has been largely spot and vol driven (rather than leverage in futures)
2/ Spot demand from unprecedented transaction amounts in NFTs along with the constant buying of calls in large blocks. All this on the back of the EIP-1559 catalyst. With this recent push through 3800 we are starting to see some funding pressure as leveraged players..
3/ ..join in on the move higher. In spite of the decisive rally, the market remains wary of potential downside risk. We can see this from the risk reversal levels:
(a) BTC risk reversals have not broken out of range and remain close to par in spite of the call buying onslaught
1/ 50 years ago, on Sunday 15 August 1971 Nixon took the US off Gold convertibility. This was arguably the single most important economic shift in modern economic history
2/..the 1st step in complete shift to Fiat-based monetary world. With this shift money supply became unencumbered. Central banks could now expand their monetary base without fear of claims on their reserves. Without the Gold-backed limit on money supply the floodgates were opened
3/ Since then, there has been an unprecedented rise in central bank printing. Money supply has grown in a parabolic fashion and has seen an even more exponential rise in the wake of Covid. Central banks have treated this as a free pass to print whatever they need to..
1/ A bullish self-reinforcing cycle seems to have developed in ETH. The dynamic is as follows:
- ETH spot rallied, pricing in the impact of EIP-1559. (85% price increase from the 1718 low in July)
2/ - The sharp move higher has reignited interest from speculators who are no longer just trading with leverage on ETH, BTC and altcoins. NFTs are the new speculative darling.
3/ - The trading volume in NFTs has been incredible, surpassing any other ETH transaction venue now including Defi and Stablecoin flow
1/ Another try at breaking 40k-42k in BTCUSD today despite Amazonโs firm denial of the rumors about them accepting crypto as a mode of payment
2/ The QCP options desk saw the same pattern of flow in the options market that occurred before the Monday rally, a wave of call buying (over 2,000 BTC notional at 42k-44k strikes across 3-week expiries)
3/ In addition, there was an unusual spike in the FTX margin lending rate to 300% in line with the large spot buying on FTX at the same time
1/ We turned bullish last Wed but werenโt expecting the short squeeze to happen quite so soon! Weโve been pleasantly surprised by how supported the market was after Wednesday & sentiment flipped decisively bullish into the weekend
2/ The QCP options desk took down a decent amount of front-end call buying flow in the last few days. Of particular note was the call demand from one or two large players who lifted about 2,500 BTC notional of close-date calls across 33k-36k strikes
3/ Market was nervously bid as we approached the 35-36k short gamma region. Dips were brief and shallow, coupled with the non-stop call buying requests popping up late into Asia night on Sunday
1/ There's been much talk about the upcoming GBTC share unlocks which begin in earnest next week. We've discussed Grayscale and GBTC previously but would like to go into greater detail in the second part of this note
2/ GBTC is still primarily a retail vehicle, where the known public institutional holders account for 12.21% of the total outstanding shares - of which 3AC is the largest shareholder at 5.62%, holding a very auspicious 38,888,888 shares. The upcoming unlocks are for..
3/ ..institutional holders who subscribed directly to GBTC 6 months ago & this batch consists of all the new Q1/2021 positions, largely ARK's last tranche. To be clear- we dont expect these unlocks on its own to have significant impact on the overall market outside of GBTC itself