The BTC ETF approval by the SEC and successful launch of the Proshares ETF ($BITO) has fueled a strong rally in BTC beyond the 64,900 previous high to a new all-time high of 67,000. 🧵
We remain optimistic but are cautious about downside risk for the following reasons:
1) Leverage levels in the market are very high.
Futures aggregated Open Interest exceeded 400k BTC notional (Chart). This is close to 431k BTC notional OI at the previous all-time high.
BTC perpetual swap funding rates also spiked above 60% (annualised). However, 60% is still shy of the frenzied levels north of 500% we saw in April this year. (Chart)
This means there is possibly still room for additional topside euphoria but we are at levels that are starting to stretch the market.
2) Chart wise, BTC is testing support on the super steep trendline from the end of September (Chart). A decisive break below the trendline could see a short-term top form in BTC.
TDST support levels for BTC: 61,125 / 56,860 / 53,860
ETH played some revenge catch-up in the last two days with a sharp bounce off the 0.06 pivot level in the ETHBTC cross and forming a bullish morning star pattern (Chart).
ETH vols have rallied significantly and are at elevated levels especially when compared to BTC (Chart 5).ETH risk reversals also remain heavily skewed towards calls (calls more expensive than puts - Chart 6) indicating strong underlying bullish sentiment in ETH.
We expect ETHBTC to perform well in the near-term.
Other layer 1s have naturally joined the alt rally. SOL in particular has broken out nicely from the wedge discussed in our previous update (Chart).
Our long gamma and vega position in SOL has performed brilliantly and we continue to accumulate vega in SOL, DOGE, ALGO, BCH, LUNA, ADA, AVAX (new!), BNB (new!).
However, our best trades this week have not been in options but in selling spreads. Back to basics, buying spot and selling forwards up to December for 25-30% annualised has been a no brainer delta-neutral trade.
The spreads have now dropped below 20% and we expect them to normalise further (current spread run below).
Feel free to hit us up for a live spread run if you want to trade the forward spreads. It is difficult to find 'risk-free' rates of above 10% anywhere outside of crypto.
Part 2: The following are some of our thoughts and market views about what might follow on from the Bitcoin ETF approvals: 🧵
a. An Ethereum ETF will likely follow soon after as CME already offers Ethereum futures contracts. However, this also means that until other coins have a futures contract, the US will only be limited to Bitcoin and Ethereum ETFs for the time being.
b. Bitcoin and Ethereum ETFs could reverse the sharp decline in Bitcoin and Ethereum dominance in the crypto market (Chart)
Part 1: In the last few weeks, Bitcoin has made an impressive rally on the back of potential ETF approvals and just pushed to a 62,910 high on the back of the Valkyrie and Proshares approval. Here’s our take on the matter. 🧵
1. The approval of a Bitcoin ETF is a positive development. Whatever the case may be, a progressive step from the regulator is good for Bitcoin and the cryptocurrency market at large.
2. We've always said a Bitcoin ETF would be a game-changer. However, in our minds this ETF would have physical Bitcoin as its underlying. The ETFs currently in line for approval have CME futures contracts as the underlying instead.This makes a huge difference.
1/ BTC has been trading in a 53,500 - 58,000 range since the big run-up last week. It’s also been noticeably outperforming ETH and most altcoins.
2/ In spite of the numerous liquidation-driven dips, the 54,000 TD Support Trend level has held very well. A clear underlying sense of optimism as the market awaits SEC’s decision on the BTC ETF applications starting next week.
3/ Funding and forwards have also been heating up over the last two weeks since SEC chair Gensler made favourable comments about a futures-based BTC ETF. Perpetual swap funding went from slightly negative in the end of September to around 20% now.
1/ Markets are abuzz with BTC up 16% since the start of the week. The market is hopeful Q4 this year will repeat the 180% rally we saw in Q4 last year.
2/ The speed and size of the move has been surprising and was clearly caused by a short squeeze (liquidation of leveraged short positions). We highlighted this possibility on Tuesday as we observed an unusual divergence in perp funding rates.
3/ DYDX perps had positive funding at extremes of up to over 100% while the Chinese exchanges had negative funding rates.
And sure enough, a large portion of the liquidations occurred on Chinese exchanges yesterday.
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/ 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, ‘drive by’ style
3/ We’ve 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..