Market Update: 26 Oct
Another week of resounding good news for BTC. On the back of Paypal’s announcement and Paul Tudor Jones’ on-air swooning part deux, BTC was easily lifted through 12,500 last Wednesday. Underlying demand continues to be strong and pullbacks have been short and shallow.
We’re now seeing many analysts dust off their S2F models and declare $70,000-$100,000 BTC targets again. The most notable development for us since mid-oct has been the clear decoupling of BTC price from macro risks. BTC has shown resilience in the face of:
i) Other macro assets (Chart 1: ETH — Green, Dollar Index — Red, MSCI World — White),
ii) US election risks (Chart 2: Biden polls — White, Biden odds — Red)
iii) Uncertainty over the US stimulus bill
In other news…
ETH has been hit yet again by Defi worries after another smart contract platform exploitation/hack — this time Harvest. The perpetrator got away with ~$24m, and by swapping out to RenBTC and then to BTC in a flash, any chances of recovering the funds are now next to zero. This will weigh further on ETH and could cause it to underperform BTC in the near term. Without any of the upside momentum from Q3 left, it remains stuck in its wedge formation, having come off hard from its upper trendline yesterday (Chart 3).
Traditional macro assets have been chopping around to Washington stimulus headlines lately and we are wary of a possible broad risk-off move. The worst case for markets (and BTC) would be a hung election — with a split Congress and White house. Democrats have been outright favourites, with markets pricing a >60% chance of a sweep earlier this month (and 70% chance of either White house or Senate). These odds have normalized in the last week, along with Biden’s polling, to about a 50% chance of a sweep now. We think a tighter election will be bad for markets and after 2016’s polling debacle, there may be more who will be warier of holding the event risk this time around.
With US election results unlikely to be known on the day itself, it seems everyone is pushing back the risk timeline — as we can see from the BTC volatility curve (Chart 4). The near-dates are still very suppressed and the forward implied vols show the largest kink between the 13 Nov to end-Nov tenor. Safe to say its mostly been a wait-and-see game, and BTC spot price has benefited from that. However, a broad macro risk off is likely to cause a drag on BTC as well so that is something to watch out for this week.
Flow wise, most of the action is coming from the US. Futures positioning (Chart 5) now shows CME as having the largest OI (aside from OKEx), with institutionals there at record longs. This flow will be much stickier than the typical retail leveraged longs, and more importantly have much wider sell stops. CME is only 9th highest in daily turnover (Chart 6) but has the highest OI, a sign of sticky long-term directional flow.
In options, last week saw the 2nd highest daily option volume on record, just below the 27 Jul record this year (Chart 7). Massive option flow days are significant in setting a spot price floor — and just as we saw the 27 Jul day’s open/low of 9,900 holding out through the selloff last month, we now expect the 11,900 open/low of 21 Oct to form a strong support level in BTC.
With BTC testing its upper trendline resistance now around 13500, we are leaning on the 12,000 support level, as it lines up with the 21 Oct low as well as the trendline from March lows (Chart 8). We remain core long BTC, long gamma in the front end and continue to sell puts but at lower strikes (10k and below) and for longer expiries (out to Dec-Mar).
