Market Update: 4 Aug 2020
Any doubt of BTC becoming a bone fide macro product is no longer in question now. When Covid hit financial markets in March this year, it accelerated the adoption of BTC as a liquid, tradeable modern day store-of-value, in line with other larger financial assets. Chart 1 below, comparing (BTC — Purple line, Gold — Blue line, Nasdaq futures — Green line & USD Index — Orange line inverted) clearly shows this paradigm shift — demarcated by the Red vertical line. The correlation has picked up dramatically from one that was almost non-existent before.
This makes BTC much less the speculative asset it was in the 2017 or 2019 bull run, and much more a trading asset now, with its value locked in cross-asset movements. As a trading asset, the use of more sophisticated derivatives such as options become key to capturing the full value of moves that no longer grow in X multiples of price in very short time-frames like in the last 2 bull runs. We are seeing market participants increasingly grasp this point — evident in the exponential growth in options OI especially since Mar/Apr this year (Chart 2).
However as a trading asset — positioning also becomes paramount. In the last update before the parabolic 10.5k breakout, we mentioned a growing positioning that has not yet reached stretched levels. Since then however there are a few indicators that are flashing amber on our dashboard. The first is the option Put-Call ratio (Chart 3), with Calls at the highest level relative to Puts since the Feb top (Feb 14) and May capitulation (May 7). The second is BTC futures total OI, which now surpasses the Feb top levels (Chart 4). Even if the overall pie has grown to accommodate this increase in OI, moves generally driven by leverage positioning increase still holds a high risk of mean reversion. Whether Sunday’s move was the actual washout itself (similar to May) and the uptrend resumes — will depend on the 2 levels bounded by Sunday’s range — 12k to the topside and 10.5k to the downside.
With leverage funding costs now sustaining at the most expensive since Feb/Mar (Chart 5), BTC will need a strong continuation in upward momentum this next week or two in order to sustain this. A possible catalyst could come from the next stimulus bill being negotiated in Congress right now. But to us with the entire market now hanging on the weekly trendline and 10.5k breakout level, a deeper correction that shakes out the weak hands is not out of question.
Nonetheless we have been firm believers in this secular new-age trend of modern monetary theory (MMT) stimulus driving hard assets significantly higher. We are still selling Puts to accumulate BTC as we’ve been since March, but have grown conservative on our strikes below 9k, while increasing the duration, and retain our short calls at 12k still, a level we see as being strong on the daily chart — and ahead of the powerful 2-day TD 9 coming up this week (Chart 6).
