Market Update: 4th May 2021
The bullish force is strong throughout the crypto world. Once again we saw a post-month end rally pushing BTC from 50k support towards the 60k level. ETH has been even stronger making new highs everyday in what seems to be an unstoppable rally into July’s catalyst event (EIP-1559).
The driving force remains the same, the wall of money from traditional finance pouring into crypto. The lightspeed growth has been the fastest of any asset class in the history of the world — a $2.2 trillion rally in just 14 months from barely $100bn last year to over $2.3 trillion today (Chart 1).
This first exponential phase was largely beta, riding on the back of Fed QE-infinity money printing, which drove a full-on hunt for yield and dash for trash. Triple-C credit spreads for example, the worst of the junk, has seen a one-way compression to now equal the 2007-boom record lows, particularly in a global economy that is hardly firing on all cylinders (Chart 2).
Risk premiums are bordering all-time lows because financial risk right now seems to be non-existent with the Fed as the ultimate backstop. And crypto which sits at the far end of the risk spectrum has benefited immensely.
Last week’s FOMC meeting repeated the same dovish message, but after an initial ‘risk on’ reaction, risk assets saw a distinct lack of momentum and clear reversal thereafter (Chart 3: Red line FOMC Meeting -> Equities — White, Dollar — Orange, Rates — Blue). We think the market is starting to price a hawkish change in stance into the June and all-important September meeting later. We expect Fed speakers this week will now set the stage for this shift in domestic stance and outlook, although the worsening Covid situation will likely buy them some time.
Our top 5 takeaways/thoughts from here:
- The Empire can strike back — the USD is now a big risk to the crypto market, and the USD is beholden to the Fed. The crypto-sphere is inherently & perpetually massively short USD (against crypto assets), and any spike in USD funding or appreciation in USD value will affect it greatly. The USD looks like it has found a lasting bottom here, with a monthly TD 9 marking the lows, but it still needs a strong rally to suck the steam from the crypto market (Chart 4). The building blocks are in place for a possible short squeeze this year, especially with the amount of unhedged USD-debt surging since the crisis, adding to the world’s large outstanding USD liability. The trigger has to and will be the Fed.
2. Is ETH the new Gold? Not that ETH becomes the new safe haven, but rather that ETH does to BTC in the next 3 months what BTC did to Gold for the 2nd half of last year and Q1 this year. This means that ETH not just outperforms BTC, but also that BTC falls into a long consolidation phase akin to the Gold consolidation of the past 9 months (Chart 5).
3. Alpha will trump Beta going forward — If the Fed starts tapering discussions & the USD starts appreciating, then there will be a lot of alpha opportunities in the space as beta runs dry. This will likely be concentrated in the derivatives & Alt markets, where increased institutional adoption will mean increasingly exotic and liquid products.
4. Institutional infrastructure will still be built primarily around BTC this year, but Alt-derivatives (led by ETH) will see the biggest growth. This means BTC will still be our preferred venue to execute institutional strategies, but the Alt-market will be where we will spend most of our time developing markets. First up are Alt options, of which we will be launching a few of them en masse this quarter.
5. Overall we expect the BTC share in crypto to keep declining further — likely to the 2018 lows around 35% (Chart 6). By that time, we expect a mass discussion by BTC holders for a handful of their favourite Alts to own as part of crypto diversification. As of yet this discussion hasn’t perpetuated the mainstream BTC Hodler to a large extent thus far.
In terms of trading — we think last month’s $65k top will hold for an extended time, and $60k will form a significant resistance in the interim. We count 5 waves down from the April top, with a 3-wave correction thereafter, signifying an end to the year-long uptrend (Chart 7).
We still like our strategy selling Jun & Sep strangles of $40k puts and $64k & $65k calls respectively, but skewed towards selling the call side. We’ve also started selling covered calls on our overall BTC holdings to take profit on all within the $60–64k range. The first support level is $50k, followed by the daily TDST level of $47k which we bounced at last month (Chart 8).
For ETH, today is the 9–13–9 daily top and we take profit on our long Jun calls following this sizeable rally. We see $3k as the first strong support level, and will keep holding our full long ETH position until a close below this level (Chart 9).
Overall, we much prefer selling BTC vol and buying ETH vol, and we find it puzzling that both implieds are trading in such lock-step when the realized is beginning to diverge significantly and has done so time and again. Another strategy we like and have increasingly seen is selling BTC vol and taking the premiums in Alts, in line with our top views now.
