Market Update: 9 Mar 2021
A positive start to the week with BTC bouncing off the lows from the previous week. There has been widespread stabilization in global markets with positive macro sentiment ahead of the Fed meeting next Thursday.
This improved sentiment is a result of the recent run-up in US nominal yields appearing to lose momentum at a key technical level, on the back of soothing comments from FOMC governors last week (Chart 1). Increasingly, BTC has seen a stronger correlation to risk markets since the start of the year (Chart 2), which itself is being driven by expectations around the Fed and its impact on real rates. Any further decline in nominal yields will no doubt be a major positive all round, but we have our eye out longer-term for the extremely key 2% nominal level in the US 10 year (Chart 1 — red line) which we expect will be key to every financial market this year.
Not only does this represent an important psychological & technical turning point, but crucially also the positive/negative long-run real rate level as per the Fed’s 2% inflation target.
With BTC still tethered to risk markets, we will probably have to wait till after the Fed meeting next week for a big move either way (Chart 3). In the meantime the range market should persist — and its possible that BTC goes on to test the underside of the broken trendlines at $55k with an upper limit at $57k before coming off again (Chart 4).
On ETH the key topside level will be $2k (Chart 5). Our playbook now is that a further extension could happen in the next day or two before coming off on Thursday and Friday into the weekend — but at $54k here we are in the upper reaches of the range already.
The weakness we’re expecting from late-Thu into early-Sat is in-line with what we’ve seen the last 2 weeks since the Feb top, in which weakness around the Friday option expiries have been a clear standout — and if indeed option related then likely to persist into month-end (Chart 6).
With this extended range persisting, implied volatility has continued coming off very meaningfully (Chart 7), as has the put-call skew — which had been elevated as traders rushed to buy downside protection in the last week of Feb (Chart 8).
We had been holding off buying downside vol anticipating this rebound, but will now be looking to take off the $48k end-Mar call we own and swap it for a long $54k end-Mar put for roughly half the value. This March-end will see the start of the 4 month-end Supermoons this year, and as a cheeky play we like owning volatility around those dates.
One asset that has really had its shine taken off this year has been Gold, which is now down 12% in 2021 alone (Chart 9). While the short-term correlation with BTC has been in deeply negative territory for a few months now, the longer-term correlation as well is heading into negative territory as more investors start looking to BTC as their macro hedge instead (Chart 10).
In times of stress though, BTC would have nowhere near the liquidity of Gold, and we could see the fortunes of the latter pick up sharply then. For us we’re watching the incoming parity level of 1 KG of Gold to BTC, where if reached we expect much talk around this to build in the financial media (Chart 11).
Finally we have been seeing a persistent discount in GBTC (Chart 12) and even ETHE (Chart 13), that has swelled to double-digit negatives over the course of last week, with GBTC hitting up to -15% at its worst.
While fundamentally such a negative discount doesn’t make sense considering costs around security & custody, without a share redemption program in place there really isn’t any direct impetus for this spread to close, and it could persist considering the many arb investors with a long Grayscale position and the negative carry implications that position carries.
For now there doesn’t seem to be any lasting knock-on backwardation effects on other markets, with the BTC futures basis dropping quite dramatically last week to almost flat even as spot recovered (Chart 14), but that has now bounced back again as new leverage positions are added to to the market (Chart 15).
