Market Update: 30 Sep 2021
Market has been trading sideways but in a wide price range. A 4,600 point range in BTC (40,600–45200) and a 450 point range in ETH (2,735–3,185).
While BTC and ETH remain rangebound, we’ve seen various Altcoin prices moving idiosyncratically. Most notably DYDX which has defied gravity, reaching a high of 28 USD while most of the market remained capped on the back of negative headlines out of China and potential macro headwinds out of the US.
For the first time in a while, we were short ETH gamma (short tenor calls and puts) going into the weekend (against long gamma in Alts). We did this for a few reasons:
- Vol levels spiked on Friday as spot prices gapped lower on the news about China enforcing anti-crypto regulations (Chart 1). At these levels, we preferred to sell rather than buy gamma.
2. We expected massive option selling after the month/quarter-end September expiry as players roll their positions. Vols did indeed top out post-expiry as anticipated (Chart 1).
3. We felt that the dip was overdone and was more of a knee-jerk reaction to the headlines. China’s anti-crypto stance had already been priced in by the market before so this was not new. Naturally, we expected prices to mean revert and find some stability. This also happened as anticipated.
Even though our views were right, the end result was mixed. We were able to take profit on some of the short gamma into the weekend as the vols softened. However, we only squared up completely by mid-week. In the meantime, trading the short gamma in the choppy market proved to be challenging.
From mid-week to now, vols have rallied significantly on the back of some massive put demand in both ETH and BTC (Chart 1). We were fortunate to have been long gamma into this wave of buying. We took the other side of some of these large option buys and have turned small short gamma in both BTC and ETH at decent levels.
Last Friday’s selldown also resulted in compression of the short-dated forwards. This was especially the case for ETH which saw the October/November futures-spot spread pushed down to almost flat along with perp funding sinking into negative territory.
The ETH front-end forwards have now started to normalise back into premium. Funding has also gone back to flat. However, most of the ETH curve remains lower than BTC (Chart 2). In addition to this, ETH risk-reversals remain skewed to the downside (puts more expensive than calls — Chart 3).
Our options desk also picked up on unusually large buy orders at very high prices for ETH short-dated put wings (low strikes) this afternoon in Asia.
To be clear, we are not bearish ETH here. However, given the huge demand for puts and compression in the forward curve, we can’t help but be wary of possible downside.
Going into Q4, these are some of the macro issues we are paying attention to:
1. US Government Shutdown & Debt Ceiling
We do not see material risk around the US government shutdown. We’ve had this situation multiple times in the past under the Obama and Trump eras. We think that the market would not be affected even if there is no resolution past tonight’s deadline.
The Debt ceiling, on the other hand, presents some risk. However, there is leeway as the Treasury will only truly run out of cash towards late-October or early-November. The Republicans are probably dragging this to use as a bargaining chip for their interests in the big infrastructure bill. It is likely that they will eventually resolve the issue. We don’t think the Republicans will risk using a filibuster on this in the middle of a pandemic.
2. China’s Crypto Crackdown
The recent bout of Chinese hostility has been the most draconian and wide-reaching compared to previous times. There is possibly added urgency for anti-crypto enforcement in light of the damaging power shortages the country is facing now.
Previous anti-crypto announcements such as the ones in May 2021 and November 2020 resulted in a cap on crypto prices for around two months. We expect a similar situation here as well.
3. SEC decisions on BTC ETF
The market is eagerly waiting for the approvals to launch BTC ETFs in the US. The approvals start from 18 October and continue into the end of the month. These first few applications will be closely watched and will give good indication about the SEC’s approach to this issue. This will extend into November and December when final decisions on the VanEck and Wisdomtree applications will be made.
Overall, we struggle to find any directional conviction amidst the macro and market crosswinds. Our strategy going into Q4 is to remain fairly neutral and nimble. The book is currently slightly short vol in BTC and ETH against long vol in BCH, DOGE, ALGO, LUNA and SOL.
