The outbreak of the Russo-Ukrainian war saw BTC trade close to 38,000 lows. Crypto markets have since made an impressive recovery (led by BTC) and we are trading back at pre-invasion levels of around 44,000 in BTC.
So where do we go from here?
We are moderately bullish in the short-term. From the historical post-invasion analogs in modern wars that we highlighted in our February month-end report (https://docsend.com/view/d63s5rynein2r25v), we expect the market to remain supported in the next 3–6 months or so.
In the next few weeks, we expect volatility from significant macro events. US CPI on 10 March and the FOMC rate decision on 16 March will shift the market’s focus back on the Fed.
The market is keen to see how the Fed responds to war and the severe inflationary impact that has followed. Already Powell’s testimony earlier today in the House was noticeably more dovish and the probability of a 50 bps hike in March has been priced down.
We maintain the view that there will still be some downside risk as we head into the 2nd half of the year as macro markets deleverage on the back of Fed tightening and balance sheet reduction.
However, this coming dip could be the best opportunity to build up a structural long position in crypto. The war has instigated a tectonic shift that we think will form the foundations of a multi-decade crypto bull run in time to come.
In response to the Russian invasion, the West has launched the largest and most coordinated campaign of economic warfare in history. This includes widespread sanctions (even from historically neutral countries like Singapore and Switzerland) and the effective weaponization of the SWIFT system.
This might not seem like a big deal on the surface but it really is. If the global fiat system becomes a geopolitical tool that can be used to alienate a superpower, then alternatives to fiat become critically significant.
Crypto becomes an important method for transactions and a vital avenue for the large storage and preservation of wealth. We think that this war has fundamentally shaken the credibility of the fiat financial system. On the other hand, it has subtly but definitively established crypto as a necessary alternative.
In fact, the mass outflow of assets from Russia might explain the material crypto inflow (especially into BTC) in the last few days. This makes sense given BTC’s place within crypto as a ‘safe haven’ coin. We’ve been seeing significant buying in BTC spot and BTC calls this week (1,500x BTC MAR 45k C on Monday alone!)
The focus on BTC was reflected even in the vol markets with 10d realized volatility 4% higher for BTC than ETH (99% vs 94.5%). Anecdotally, there has also been much more topside interest in BTC compared to ETH. This has caused the implied vol spread between BTC and ETH to drop back to lows of around 7% (Chart 1).
With the recovery bounce in spot, implied vols have been trading softer as well. BTC 1-month implieds have fallen back to 65% from 80% highs. ETH 1-month has fallen to 75% from 93% highs (Chart 2).
We added to our short vega (longer-term options) position, selling the vol spike post-invasion. We are nett neutral gamma (short-term options) and continue to be long on the wings (far-strike options). We have been tactically accumulating long vol position in the 18 March bucket as we expect outsized volatility going into the FOMC rate decision on 16 March.