Market Update: 6 Dec 2021

The violent sell-off on Saturday saw BTC trade to 42,333 lows, a hefty 39% drawdown from 69,000 highs.

The result of weekend illiquidity against a risk-off overhang from Omicron fears, inflation concerns, the possibility of an accelerated taper and also weakness in the Chinese stock market.

Chart 1

The China factor stands out for us as funding rates on Chinese-dominated exchanges like Huobi, OKEX and BYBIT continue to be very negative in spite of the bounce in spot off the lows (Chart 1).

Chart 2

This indicates persistent selling out of China. In contrast, funding rates in other exchanges normalised very quickly (Chart 2).

The immediate trigger for risk-off in China was Didi announcing the intention to delist from the NYSE on Thursday 2 December raising concern that the China Securities Regulatory Commission (CSRC) was pushing Variable Interest Entities (VIE) to drop their listings in the U.S.

More bad news followed with China Aoyuan and Sunshine 100 both missing their respective bond repayments.

Chart 3

In spite of the shock sell-off, vol markets remain relatively calm. The knee-jerk spike in implied vols was faded very quickly (Chart 3) and the vol term structure reverted to an upward sloping one (Chart 4). This indicates no heightened fear or panic in the near-term.

Chart 4

With the persistent negative funding in Chinese exchanges, we reckon a push higher in spot could actually trigger a short-squeeze. Care the topside!

Fortituously, we won 100% of the puts in the Defi options vaults on Friday ahead of the dip (more than $300 million total notional mainly from Ribbon.finance and Thetanuts.finance). We were able to take profit on a chunk of it when vol spiked briefly.

We remain long gamma and are struggling to realise it with a relatively tight spot range in the last two days.

On a broader level, we have been buying up tails (far strikes) as we head into 2022. We expect a tricky macro environment going forward. This increases the potential for extreme and violent moves like the one we just saw.

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