The overarching theme in crypto is one of contracting liquidity and thinning exchange volumes, as market makers pull back from the business. With little crypto specific news, last week the market basically flatlined, except for a gentle push higher Thursday as shorts trimmed positions. However, over the weekend, chatter about an FTX unlock caused a 7% dip in SOL, which catalysed many alts to drop 3-6% on Sunday, followed by the majors on Monday, with ETH dropping through $1,600 first, followed a few hours later by BTC dipping below $25,600. Nevertheless, long term support lines around $25,000 and $1,520 held firm, and both pushed sharply higher on Tuesday back to around $26,000 and $1,600.
Main themes in flows were strong buying of BTC and strong selling of ETH, perhaps to be expected given the cross dropped 3.5%. Amongst higher volume alts, we saw good buying of DOGE, good selling of MATIC. By geography, our APAC clients were better buyers, EMEA better sellers; by client category banks and retail brokers stood out as good buyers.
Futures basis largely followed spot, dropping off from Friday to Monday, yet a closer look supports the story we see from our flow breakdowns: a divergence of opinion between BTC (more positive) and ETH. CME Sep BTC basis is up from 3.0% to 5.0% over the week, Oct remains unchanged at 5.5%; both compare favourably with ETH where Sep basis is down from -1.0% to -3.0%, and Oct is down from 4.5% to 3.5%. Deribit shows a similar story: BTC basis for Sept is down from 4.25% to 3.25%, and Dec is unchanged at 4.75%; both compare favourably with ETH where Sep basis dropped from 2.0% to -1.0%, Dec down from 4.25% to 3.25%.
Option markets have been quiet; current Deribit September run-rates imply a 30% drop in volumes from August. The primary theme over the past week has been buying low delta wings on both sides. Larger volumes were buying calls, specifically October BTC calls. These were picked up on Thursday last week (Oct $30k and $31k calls) and also yesterday (Oct $32k and $33k calls), presumably all bets on ETF decisions due next month. Last Friday Dec low delta puts were scooped up in ETH and BTC. Apart from those directional bets, we also saw covered call selling in ETH last week, with Dec and March $2,200 ETH calls being sold. The demand for BTC vol, and the continued oversupply of ETH vol, is causing the ETH surface to get quite cheap relative to BTC, around 7 vols discount in the belly of the curve, despite realised vol remaining largely in line, which looks interesting from a relative value perspective.
Although it will certainly be interesting to see what the ECB does tomorrow (hike to tame inflation or hold to avoid damaging a weak German economy), the US CPI out today will be the main macro event. Expectations are for YoY CPI to increase from 3.2% to 3.6% due to higher energy prices plus base effects, and YoY core CPI to drop from 4.7% to 4.3%. Above expectations on either, particularly core, will give cause for concern to crypto bulls. Next Wednesday we have the Fed, for which markets are not currently pricing much risk of a rate hike, although they do imply one more hike is possible by year end.
Macro apart, deteriorating liquidity conditions in crypto are creating an environment where prices will flatline for long periods without doing much, then break violently as large orders are executed into exchange order books which have been populated mainly by HFTs who are not willing to take delta risk for any length of time. With that in mind, it would be interesting to observe price action if we do break below the strong medium term support lines around $25,000 and $1,520.
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