Month-End Update: Feb 2021
Feb 2021 ends on a very weak note, with BTC about 26% down from the high of 58370 (21 Feb). But to put things in perspective, this month is still set to be the largest absolute monthly gain in BTC history (Chart 1). This also means the market is still sitting on huge unrealized profits. Last week when BTC was trading at all-time highs, the HODL mentality was pervasive, with most people we spoke to unwilling to sell anything below $150k (the level where BTC will equal Gold’s total private sector investment market cap). The question now for BTC in the medium-term is whether the HODLers can withstand a further drawdown and at which point the longs will start to feel the pain.
We’ve been flagging the seasonal weakness in this period for awhile now and switched to full defensive mode coming into Feb (although the cross-asset risk-off didn’t factor in our calculations then). We’re still closely watching the $40–42k level on BTC — which is the confluence of the Tesla-led breakout and parabolic trendline since the March lows (Chart 2). We expect many trend-following CTAs to be leaning on this as a hard level now, especially with the recent increase in longer-term realized vol to the 100% level, a first trigger for position reduction (Chart 3).
Only a close below this 40–42k level will turn us from defensive to near-term bearish. Our preferred structure to play that will be buying zero cost 1m downside risk reversals (sell calls buy puts). So far we haven’t pulled the trigger on that, choosing instead to trade the gamma around our long 48k call, which has been realizing very well the past week.
Our other trade selling the 1m-9m futures basis has been decent too and we like keeping it, with the 3m rolling basis falling below 20% now from 35% last week (Chart 4). What’s surprising to us is the steadiness of the funding rates across the derivative exchanges, even in the face of a rather violent spot move. The deleveraging in futures has not really gathered steam yet, retail is still buying the dips in BTC — with perps funding not sustaining below negative at all throughout the week (Chart 5).
Overall futures OI has reduced from 19bn to 15bn, and we think $10–12bn represents a healthy correction target for a more balanced market.
ETH however is our main worry as deleveraging there could get violent in both directions — and we expect the ETH-BTC 1m realized vol spread, which has amazingly just turned negative, could very soon normalize to more logical levels (Chart 6). The implied vols however have been anticipating that and is largely brushing off the realized move, but should we correct there in sympathy then we would be looking for good levels to pick up some cheap ETH vol for a Mar/Apr move (Chart 7).
On the spot market $1270 is the closest support level, but really as we mentioned last week we’re not confident of anything above $1k there (Chart 8).
Just a glance at the Grayscale premiums can give an example of how crazy ETH can get — 8 months ago in June we were at a 9329% premium to spot, and last week we went negative (Chart 9).
This mirrored the GBTC premiums closing in negative territory for the first time as well (Chart 10).
A few factors we think caused this — the big equity risk-off which hit retail counters the most, and also the Canadian ETF which has taken in $700m so far — a big part of it exiting from GBTC which saw its AUM decline from US$35bn to US$31bn. Although as mentioned Grayscale won’t be selling any BTC or ETH despite a lower AUM, our worry is the many players using GBTC and ETHE as part of their cash-and-carry strategy and whether a sustained discount there will have severe knock-on effects across the curve. This is our first risk going into March.
Our second risk is whether the very high profile Tesla allotment of balance sheet to BTC, along with Microstrategy’s never ending debt & equity raises solely to buy more BTC will catch Elon’s old nemesis the SEC’s attention. While we definitely don’t expect a change in the SEC’s classification of BTC as a security, we wonder whether instead the scope of the Investment Company Act of 1940 could be broadened. The entire premise of the corporate treasury management now lies in BTC not being a security and therefore not falling under the purview of the Investment Company Act. The same applies for Grayscale — which is a trust also not governed by the Investment Company Act (but rather the Securities Act). Any amendment to the Investment Company Act could affect both sides. This for us is the tail (low probability but very high impact) risk. Including their most recent purchases, Microstrategy now owns 0.486% of the total BTC circulating supply, and we estimate corporates as a whole account for about 4–5% right now.
The FOMC meeting on March 17 remains the key risk for markets — and no doubt the move in Rates, Equities, Gold and to a lesser extent USD has been worries going into this Fed meeting. Next week being the last week before the blackout begins, all Fed speakers on schedule will have the limelight. For BTC we think large cross-asset moves will no doubt affect it in the short-term, but otherwise we don’t expect a sustained correlation with other markets in general. In that regard soothing words from the Fed speakers this week could help markets as a whole find a short-term footing before the meeting itself.
Prior BTC analogs have recently piqued our interest though, and we present here all 3 — an analog with the 2017 move, the 2019 move and last year’s Feb/March selloff, with the tops in each aligned with last week’s top.
These 3 analogs cover all 3 trading scenarios, which despite our long-term bullish bias we don’t like to rule any out — 2017 being the big bubble top (Chart 11), 2019 the more drawn out medium term A-B-C correction followed by a subsequent fresh all-time high after (Chart 12), and last year’s Feb/Mar analog being the seasonal correction (albeit to a far lesser extent) followed by a strong April bounce (Chart 13).
The common factor in all of them right now is a very near-term recovery over the next week or so followed by a deeper correction after and this is our playbook right now. On a bigger bounce however we would be looking to put on the risk reversals and possibly buying vol around the 19 March expiry.
Finally this broadcast has been focused on writing about BTC and ETH due to their clear market leading tendencies and institutional focus. However in this pullback we have also noticed a differentiation amongst some of our higher prized Alts, and generally a lower correlation overall with BTC & ETH, which is an excellent development for the space (Chart 14). We expect in subsequent posts to therefore contain Alts themes as well — as the next phase in Crypto beyond BTC store-of-wealth, with the immediate focus right now being in Defi & specifically the ERC-20 replacement race.
