Key Takeaways

‍• Crypto broke lower on Friday after CPI data showed US inflation had not yet peaked
• Price weakness intensified over the weekend
• A de-pegging of the stETH/ETH cross has raised risk aversion and credit concerns
• A major crypto lender reportedly paused withdrawals, raising concerns about contagion and systemic risk
• The spot market is now in freefall
• Technical support at 22k and 20k in BTC, and at 975 in ETH

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Looking back

‍After a slow week within established ranges, US CPI came out on Friday and showed that, contrary to expectations, US inflation has yet to peak.  This triggered a strong response in treasury yields, with 2yr yields up 40 bps to 3.25%.  In crypto, the immediate response was somewhat muted, with BTC trading down to a low of around $28,900 on Friday, and holding up until Sunday, when it finally fell below $28k.  However, since then, further concerns around a major crypto lender, and the continued depegging of stETH/ETH, have created a perfect storm. With BTC now trading below $24k, clearing the low prints after the Luna collapse, this begs the question of whether the  $20k support level will be tested.  ETH has been the driver of this weakness, and did clearly break out of the bottom of its range ($1,700) after the data on Friday, trading down to $1,660.  On Saturday morning in London, ETH then broke sharply lower, dropping from $1,660 to $1,550 before embarking on a one-way ride to lows today in Asia of around $1,175.  

LINK had rallied mid-week to $9.60 after publishing a roadmap towards becoming a stakeable asset, breaking above the $8 level, becoming the first large/medium cap coin to take out its 11th May breakdown level. However, by UK afternoon, LINK had dropped back to 11th May lows at $5.50.

Since the CPI data release on Friday, today’s moves in Asia have been as follows: BTC -20%, ETH -33%, DOT -30%, SOL -34%, ADA -29%, AVAX -39%, DOGE -33%, MATIC -34%, XRP -24%.

Our flow data this week shows that our APAC clients remain strong buyers, with EMEA trading the other way. By client type, our main buyers have been funds, with all other types showing no strong bias.  Interestingly, by coin, we have seen better buying of ETH than BTC.  We also had strong buying in LTC, LNK, EOS and XLM, and strong selling in XRP, BNB and UNI.

Futures basis in BTC has drifted lower all week, and that move has accelerated with the weakness in spot since Friday; 1-month basis has dropped from the 3% area to flat, and 3-month basis from 3% to 1.5% on regular exchanges. OTC lend/borrow markets have remained quiet, with counterparties more interested in borrowing altcoins than fiat/stablecoins.

Crypto implied vols have shown an interesting divergence from recent behaviour.  Over the past few months, vols have sold off during the week and bottomed out around the time of the DOV auctions. However, last week vols held unchanged all week at somewhat elevated levels (1-week BTC at around 67% and 1-week ETH at around 83%) - right up to, and including, the Friday DOV auctions, which in the end were heavily oversubscribed and bought into competitively. Even after the data, vols simply did not sell off, and over the weekend vols exploded, with 11-day ATM vols up 35% to 105 vol in BTC and up 60% to 140 vol in ETH.  Risk reversals, which hit a post-LUNA low mid-week, have again exploded, with 11-day 25 delta riskies up around 16 vols to either side of 30 vol for puts in both BTC and ETH.  Even July riskies are 21 vol in ETH and 18 vols in BTC, seriously pumped.

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Looking ahead

‍The primary focus of the week for macro traders will be the Fed’s interest rate decision on Wednesday.  However, in crypto-land there are other issues to be concerned about.  Traders will be primarily concerned with reducing credit risk and hoarding liquidity.  Spot spreads are wide, especially on the bid side, and OTC borrowing rates for fiat and stablecoins are being marked up.  Vols will remain elevated until either time allows them to come off, or until people are convinced that gap risk to the downside is reduced.

One potential positive theme which is in danger of being lost in all the doom and gloom, is the Lummis-Gillibrand bill to push regulation of the crypto majors (BTC and ETH, and potentially other large cap coins) into the hands of the CFTC.  By implicitly categorising BTC and ETH as commodities, not securities, a large piece of uncertainty would be removed from the long-term outlook for crypto. The industry doesn’t think this bill will initially pass but we are all keeping a careful watch as the story unfolds.

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