Market Update: 19 Jan 2022

QCP Capital
3 min readFeb 8, 2022

Strange and confusing markets all round this week.

Macro markets have entered a ‘bad news equals good news phase’ where asset prices react positively to poor US economic data and surging Covid cases. A weaker economy gives hope for a less aggressive Fed hiking cycle.

Crypto markets have been eerily quiet with BTC and ETH trading in a tight range but consistently teasing for a break below 40,000 and 3,000 pivot levels.

Defi sentiment is dour with yields across the board at lows and with ‘Defi 2.0’ threatening to unravel (OHM down over 50% and Frax shares down almost 30%).

Chart 1

Vols have been frustrating as well. There is clearly some downside nervousness with risk reversals back to very negative levels (puts more expensive than calls). Both BTC and ETH front-end risk reversals traded to -9% (Chart 1). But at the same time, severe vol compression persists with BTC front end implieds even trading below 50%!

Here’s our take:

1. Macro confusion continues as we are in the Fed blackout period until the 26 Jan meeting.

2. We are getting more bullish here. The market has fully priced in a 25 bp hike in March and is even starting to price in some chance for a 50 bp hike and a total of 4.5 hikes for 2022. We think this is extreme and the market will catch a bid as it prices down the probability of such aggressive hikes.

3. So we have a long bias against the 40,000 support in BTC and 3,000 in ETH.

4. Realised vols are at lows with 10-day at 32% and 1-month at 47% (Chart 2). Long gamma (short-dated options) and long vega (longer-dated options) has been an excruciating trade.

Chart 2

5. We’ve neutralised our gamma position and have flipped to short vega. We think this sideways market could persist for awhile but when it does break out, it will be a violent one. So we are happy to earn the decay from short vega here but we have been adding to our long wings position (far-strike options) to profit on a blow-out.

Chart 3

Sidenote: We’ve been observing NASDAQ closely for clues on how crypto will trade in the short-term. BTC has been trading almost in lock-step with NDX (Chart 3).

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