Market Update: 1 Dec 2020
1. Guggenheim represents a fresh development in the market — a big investor willing to pay a significant ~20% premium in order to get BTC exposure quickly & avoid the regulatory red tape associated with direct investments.
2. This news understandably led to a surge in GBTC premiums, which in essence represents the longest end of the BTC futures curve — and this in turn steepened the whole curve itself.
3. At the front end, perps was lifted back to the yearly range highs of ~105% annualized (Chart 1).
4. The 1m basis, the bulk of CME’s 50k BTC OI, also spiked to the highs of 25% annualized (Chart 2), while the 3m basis likewise reached the Aug highs. Significantly, the native crypto exchanges have spiked above CME on this latest move up — hitting 30%+ annualized on the 1m & 15% annualized on the 3m (Chart 3).
5. This steepening dragged the CME front month above 20k, but below the all-time highs when they first launched in Dec 2017 (Chart 4).
6. On the spot market we finally registered new all-time highs after 3 years on some exchanges — although Coinbase (US market) & Bitfinex (USDT ramp) hasn’t officially reached yet. Above 20k in spot we think is when we’ll see the real fireworks.
7. Previous catalyst-led moves that have led to BTC breaking prior highs have always sustained those levels, and we want to see if the market is able to sustain this fresh high again as it has done in the past (Chart 5).
8. Today and this week should set the stage for that:
i. Corporates typically mark-to-market their books at month-end for rebalancing. So today and the rest of the week will set the tone as to how much of the asset gain results in a higher permanent re-weighting vs. rebalancing sell flows. This would be the best gauge as to how much market expectations have matched reality. Did the market price too much of corporate/institution flow when in reality the allocation has not reached as yet? Or will the new month bring fresh inflows to complement the retail speculation now?
ii. Trading funds also tend to mark their asset VAR at month-end. 1m realized vol collapsed following the long consolidation in Apr-Jul and at the start of Oct fell from 56% to 34%, making it within mandated Var limits for many funds. We’re now starting to see the realized vol steadily climb back to 72% now (Chart 6).
9. Finally, we had been wondering why the price of GBTC would collapse just before such a significant announcement from Guggenheim. We think potentially this testifies to the size of the overall lock-up position that potentially has to be unwound, such that those with this position had to front-load their “sell the fact” flow and causing the massive 30% gap in each direction.
10. Subscribing in-kind to GBTC is a play on the spread premium, with a 6 month lock-up. Along the way to take profit on the spread before the lockup ends it would require — long spot and short GBTC shares. Both sides of this trade are negative carry so putting it as close to the lock-up ending & unwinding when lockup ends is in the interest of the trader.
11. The unwind of the trade would be to close out the short and sell spot, and explains the high correlation between GBTC and BTC spot last week, and also how the short interest GBTC short interest has changed through this Q4 move (Chart 7).
12. We think trading on GBTC will continue to dictate larger market action in the near-term. The CME gap is roughly at 17k while the GBTC gap is at $18.85. (Chart 8)
13. With the reversion of near-date put skew, we like a long put calendar spread again. This means owning downside gamma, funded with longer dated puts whilst keeping the core spot long. (Chart 9–1w/1m vs 6m).
14. At the same time the steepening move across the futures curve has correspondingly lifted implied vol across the vol curve. We like selling the elevated vol outright further out the curve to earn the rich theta while collecting premiums in coin to add to the core spot long. (Chart 10).
