Market Update: 26 July 2021
We turned bullish last Wednesday but weren’t expecting the short squeeze to happen quite so soon! We’ve been pleasantly surprised by how supported the market was after Wednesday and sentiment flipped decisively bullish into the weekend.
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.
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. Finally, murmurs of Amazon accepting crypto as mode of payment provided the catalyst for the short squeeze today in Asia morning.
In spite of the sharp move higher, the market does not feel particularly stressed. Vols have rallied only modestly and only in the very short dates (Chart 1). Furthermore, risk reversals remain skewed to the downside (Chart 2) even as we close in on the 40k pivot level in BTCUSD.
So far, this move higher feels more like a bounce back into a neutral state after being overstretched to the downside below 30k. The real pain could be lurking from short gamma positions above the 40k level.
Should Amazon confirm these rumours, BTC would surely test the 40–42k resistance. If BTC price follows the 2018–20 analog that we previously mentioned (Chart 3), a break of 42k would take us up to 50k level in Aug-Sep before a bigger top eventuates.
For this week’s other event risk, we expect the FOMC to remain dovish, following Powell’s congressional testimony 2 weeks back post-inflation and other Governors’ recent speeches pre-blackout last week. While the majority still remain sanguine about transitory inflation, we expect by Q4 more urgency will come and they will join the few Hawks who have already sounded alarm bells over rising inflation and spillover financial stability risks.
