QCP Market Update: 19 May 2021
We cannot stress enough the importance of holding the 40k on a closing basis in BTC for all of Crypto. (Chart 1)
Following our identification of the trend change earlier in the month, we’re now seeing Wave 3 take us from 58k to under the 40k handle now. In market cap terms this move has shed $400bn taking us back to the Fib handle that led the breakout in Feb (Chart 2).
Our preferred Wave count is now this:
1. That this Wave 3 ends at 40k on month-end (possible stop hunt extension now as far as 36k intra-month) & we get a bounce for Wave 4 back up towards 50k first and possible 54k.
2. This Wave 4 will be driven by a dovish Fed policy mistake into the mid-June FOMC where they continue underplaying the decades-high inflation print and prescribe more easy money on the context of global risks from a resurgent international Covid wave.
3. This bull-trap Wave 4 will also be marked by a sharp increase in retail leverage as they chase the new perceived bull cycle.
4. Crypto markets have Wave cycles more akin to 80–90s Commodities price action & unlike the textbook Elliot Wave — where the Wave 5s are always the longest and most powerful (rather than Wave 3s).
5. What price level this Wave 5 could take us will depend on the Fed’s reaction — but we think for the most part Q4 will be scary in the sense that their Sep & Dec quarterly projections will no longer be able to hide the inflation impact, especially on the all-important long run.
We find it hard to see how members of the FOMC will be able to keep their forecasts low considering the increases we’re seeing from the last CPI print that makes it impossible to just pin on the expected base effects: items that were up 7% or more m/m — used cars, airfares, lodging away from home, car rental and sporting events.
What we’re seeing are all post-Covid opening symptoms, as more newly vaccinated & newly minted (with easy money) folks start going around splashing. China will be the other place we will witness this — and their next few inflation prints will have a direct bearing on global markets because we know the PBOC will definitely act on these without any worry of global risks.
We were always of the opinion that the biggest misconception out there is that BTC is a safe haven (or inflation hedge). The moves in the last few months validate this entirely. However we’ve been surprised by the USD (sell-off) while BTC is selling off as well (Chart 3). We believe this is due to the USD having the same view as us (Fed running way hotter leading to much lower real yields initially), while the BTC enthusiasm has been sucked out last week by the confluence of Elon’s corporate ESG stamp of disapproval, the SEC’s public un-enthusiasm for any ETF & the CME backwardation. Three strikes on the institutional front and hope for fresh inflows.
However harping back again to our BTC smile curve — bullish on one end from risk-on low inflation, bearish from inflation that leads to Fed tightening (current state); but at the other bullish end of the curve this also means that in the case of runaway inflation BTC will most definitely outperform again. We have no doubt Powell would love to keep the economy running at the current scalding level, however we likewise doubt the rest of the committee are collectively as gung ho, and the next 3 quarterly projections this year will give them ammunition to pull back.
Putting everything together:
1. We think at these levels its worth dipping our toes into a Jun 32k P-50k C risk reversal for 30% positive premium as a tactical trade, taking advantage of the massive put skew (Chart 4)
2. Likewise on the call side we’ve also taken the opportunity to roll down our lower delta strikes to capture this skew as well causing cheap low delta calls.
3. For those with more dry powder selling lower delta 20k puts out to December in size to capture the dramatic vol blowout we highlighted on Monday — the most idiosyncratic part being on the longer tenor of the vol curve which typically moves much more slowly (Chart 5).
4. Finally assuming a more pronounced bounce, we like to enter the ETH perps cash and carry where we expect retail leverage will be most pronounced in Wave 4.
5. Right now we’re looking to taking profit on the Sep BTC futures spread at par on another futures deleveraging event