Market Update: 21 Apr 2021
As expected, we saw the 14 Apr “Coinbase top” we were positioning for (Chart 1), that bled into a deleveraging weekend selloff that smashed through both the parabolic & channel trendlines (Chart 2).
Our favorite trade last week was to short the Jun futures basis at 40–50% annualized implied premium looking to cover at par. But even we weren’t expecting the over $10bn worth of leveraged liquidations on Sunday that caused the massively violent backwardation. The sharp dip brought front-month Apr futures close to -50% annualized implied discount, with Jun futures a -25% discount on Deribit & -40% discount on Binance where the bulk of liquidations took place (Chart 3).
We’ve since very quickly bounced back to roughly 20+% premium for Jun — a much fairer value but still a good resell in our books.
We’ve also been happy to sell close calls into the mid-month top last week — primarily 68k Jun (~70 delta then) to capture the overly steep contango and call skew. Following the weekend’s move, we’ve seen the expected shift towards a very expensive put skew (Chart 4), this time however in the unusual circumstance of a collapsed front-end vol curve (Chart 5).
We think the market probably has it right this time in terms of pricing a low daily implied in the near-term. Although the trend break has indeed wrecked a whole lot of technical damage to the chart, we’re still of the opinion that it means the upside is more capped than before (but we don’t see a full downside melt-down just yet). Support levels we like are 50k holding into month-end, and 40k into quarter-end. On the topside 60k into month-end and 65k next month will be levels to watch. (Chart 6).
In the meantime we’re happy to keep fading any overvaluation we see in the derivatives market. For now we revert to selling strangles on the longer dates — 40k & 80k into Sep, and taking this spot retracement opportunity to scale into 60k end-apr calls expecting this correction to persist into month-end. For us to change our view we’re now watching these 3 things:
1. US ETF approval process (news on concerns/delays)
2. The regulation hammer from Yellen’s Treasury & SEC (much sooner than people expect but to what extent BTC & ETH vs. Alts/Exchange tokens?)
3. Start of FOMC taper (as soon as Q3).
Finally as GBTC continues bleeding into a new record 18% discount now (Chart 7) on the back of 36 straight days of outflows (Chart 8) despite continued suspended share creation and now their own share buybacks as well, we wonder how long before holders begin clamoring for a share redemption program (GBTC will sell BTC) and whether this will come before any US ETF is approved.
