Market Update: 5 Jan 2021
Happy new year all.
The year-end rally that started after the large Christmas futures/options expiry extended with strength into the new year. The move repeated the pattern of the previous weekend’s price action with BTC embarking on a huge Friday & Saturday rally before topping out later on Sunday with a rotation of BTC into Alts. This happened exactly at the flagged 0.023 ETHBTC level once again (Chart 1), sending ETH soaring above $1k towards the $1420 all-time high in Jan 2018. ETH led a larger market-wide crypto rally across every sector of coins, with Exchange and Defi tokens benefiting the most. As with all recent exponential Alt moves — it was a short-lived but explosive one that led to immense market-wide volatility. This culminated yesterday, the first full liquidity day of the year with a massive 6000-point BTC Doji candle.
As the market takes the next few days to find its balance, these are the 10 things foremost on our minds for the new year.
- Volatility on the rise
Low volatility typically foreshadows strong trending moves while sharp rises in vol represent a warning sign for market inflections (tops & bottoms). We’ve now risen above 100% implied in all < 3m tenors for the first time since March 2020 and Aug 2019 (Chart 2). Nonetheless its just a warning sign, and with this bull market more reminiscent of 2017, the realized volatility comparison to back then shows that there’s still room for the trend to develop (Chart 3) — and we therefore expect any topping to be a longer-drawn process from here rather than an immediate reversal.
2. Option wall between 32k & 36k
The large notional strikes mostly expiring in end-Jan were bought just after the 12k BTC breakout in Oct (contract was launched on 30 Oct) and means we’ve now run into a delta wall of 40k notional BTC at these levels (Chart 4) and expect some resistance in the short-term at least.
3. March Seasonality
An outstanding pattern in BTC monthly seasonality is extreme March weakness followed by April strength (Chart 5). BTC has been down in 4 of the last 5 years in March. 2019 was the only time it was higher and the reason for that was that it came after a terrible 2018 when BTC was down 72% for the year. The seasonality picked up sharply in 2018 when tax regulations began in earnest, implying that this seasonality is likely tax related. ETH seasonality on the other hand is not strong, due to less regulatory focus on ETH before. The combination of tax related regulations picking up significantly globally, a surge in tax paying institutional participation & the out-sized BTC gains in 2020 (300% increase) makes March 2021 a month to really watch.
4. Regulation
Regulation will be the biggest wildcard for crypto this year — with a largely unknown administration taking office in the US and global attention now firmly pegged on this space. The things we’re looking for in order of importance are the new SEC Chair, incoming Treasury Sec Yellen’s first comments on crypto (and BTC in particular after her previous put-down in 2018), and the stance taken on Stablecoins/BTC by the first G10 & G20 conferences post-Covid. Furthermore, as CBDCs begin rolling out this year starting with China we are concerned about how regulators and central banks will handle Stablecoin regulation and whether they will see BTC as a threat (to capital flight).
5. Democratic Sweep
The conclusion of tonight’s Georgia senate runoff will kick off the market’s focus on Biden’s new administration. We think there might be a twist — whereby global markets (and Gold) will likely cheer a Democratic win (on the back of further monetary stimulus), while the Finance sector & BTC will be more hesitant should their sweep imply further consensus to pass more heavy-handed regulation.
6. Grayscale & Bitcoin ETF
In the crypto world Grayscale & GBTC is now too big to fail — with $16bn of AUM. With GBTC’s share redemption still suspended since 2016, the big bullish factor in the market has been that they are only buying BTC in-line with new share subscriptions but due to no redemptions are never selling thereby creating a demand/supply imbalance on a massive scale.
However should redemptions be mandated again this year then there is a potential for this supply to come back to market. We will then experience the same risks that ETFs pose in traditional markets — namely that there’s no price discovery (buying into rising markets & selling into falling markets), leading to frequent price overshoots.
The size of Grayscale relative to the overall crypto market just exacerbates this problem and right now we’re witnessing the “buying into rising markets” part drive the exponential price movement we saw last year. Flows into and out of GBTC therefore remains top of our watchlist. The downside risk is that should any forced selling of GBTC at the back-end of the curve unexpectedly lead to a futures curve in backwardation, then the size of the market-wide cash & carry (on CME and native exchanges) could snowball the spot selling effect.
On the flipside, the upside risk is that approval of a new BTC ETF this year, while GBTC still has redemptions suspended, means that we’ll get two large price insensitive buyers driving the market higher, as people swapping GBTC for the new ETF will only drive down GBTC premiums without resulting in any BTC spot selling effect.
7. Dormant Supply
Sunday was officially 12 years (one solar cycle) to the day that the BTC Genesis block was mined — and it’s interesting that so far the BTC all-time high has fallen exactly on that day. Many of the price projections that have BTC at $200k-$400k are based on ~10–15% permanently dormant supply thats forecasted as not ever going to move. Any movement of these dormant coins on the blockchain would therefore pique significant interest. Notably in terms of supply side models, the most trusted model on BTC right now — the Stock-to-Flow model has recorded its first positive variance since the Apr-Jul low volatility period (Chart 6).
8. ETH
We’ve been bullish on ETH as a whole in many prior updates. For us it remains the most logical alternative to BTC as the market evolves to PoS over PoW. With the Democrats in office, and more firms investing by way of ESG (environmental, social & governance), we wonder how long before the exponential BTC hash rate becomes an issue (Chart 7) and more institutions pivot to ETH. We think the real turning point for ETH will be a concrete indication from the SEC not classifying it as a security, followed by the launch of market-wide ETH futures on CFTC and finally EIP-1559.
9. Coinbase IPO
This market makes crypto exchanges some of the best businesses out there — and the Coinbase IPO will prove this for all exchanges in the space. However we’re a little worried at the back of our minds that BTC is partially being supported into this IPO and that a ‘buy-the-rumour-sell-the-news’ dump could potentially take place after. Definitely a date to mark in the calendars.
10. Consensus Trades & BTC
Big consensus trades tend to result in potential risks being overshadowed by the hype, and BTC is getting close to that point. BofA Hartnett’s widely followed publication published in mid-Dec had BTC as Wall street’s top 3 most consensus trades (Chart 8).
The last time BTC appeared on top of the survey was in Sep & then Dec 2017 (Chart 9) when price eventually topped. The next survey results will be out on Friday and we’re interested to see where it lands now. The top 3 consensus trades are all heavily tied to global liquidity — and this year will be the year when we could either have an exponential move higher — if the Fed decides to continue adding liquidity even after we’re past the Covid peak (likely in Q3), or if the Fed begins draining liquidity in response to better economic data and we get a cross-asset price normalization. In terms of Bitcoin tweets (Chart 10) we’re fast approaching the 2017 peak as well.
Technically we’re watching the parabolic weekly line (Chart 11) — and above that we remain bullish and long, adding to our net delta through lower delta short put positions.
Should we break the parabola however — then our downside targets will be 24k — the first lower trendline followed by 16k -the next lower trendline (Chart 12). The 14–16k downside target fits with prior percentage declines following breaks in the parabolic trendline in 2017 & 2019, and we therefore remain confident in selling longer-term puts at these levels.
