Key Takeaways

• An initial break by BTC lower through the $19.5k support level was firmly rejected Friday

• BTC traded up $2,000 to close at $21,250, leading the complex higher

• ETHBTC reversed from 0.085 highs to 0.0800 as ETH underperformed the move

• ETH basis tightened dramatically to price a lower value of ETHPoW

• BTC vol curve flattened with sudden demand for gamma as cash shorts unwind

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Looking back

It has been a fascinating week in crypto, with volatility picking up, a major trend in BTCUSD reversing, and ETH underperforming for a change. After a range bound previous week, BTC broke lower through the $19.5k support level last Tuesday, only to break violently back up in Asia three (3) days later. On the latter move, gamma was very bid, with one player taking almost 1,000 lots of 1 week options out of the market, pushing 1wk vol from 65% to 75% in 30 minutes or so; a clear indication that spot flows were likely to follow.

BTC finished that day gaining around $2,000, and the market has been searching for the reason since. Over the weekend it was announced that MicroStrategy’s SEC filing had revealed that they were considering selling $500m of equity to purchase more BTC. BTC continues to lead today, trading a high around $22,350 in Asia today on a short liquidation move.

Meanwhile, ETH is stuck below the $1,800 resistance level, as the market lightens up length ahead of the Merge, expected this Thursday 15 September; ETHBTC is below 0.0800 from recent highs of around 0.0850. Other coins which are up around 10% this week include SOL, EOS, LINK, XLM, and BCH.

For the first time in a few weeks, BTC was once again our largest volume coin, with flows biased somewhat to the buy side (52.8%). All top four (4) volumes by coins (BTC, ETH, SOL, ADA) also had a slight bias to the buy side. We had strong buying on lower volumes in EOS, MATIC, and XLM. And we had significant sell side flows on XRP, LINK, COMP, and XTZ. By client category, we saw better selling from OTC brokers, and better buying from funds and banks.

Futures basis in BTC is slightly higher on the week, trading up from flat to 1% on both 1 month and 3 month on major exchanges, as would be expected with a stronger spot market.  Over the weekend, September ETH basis tightened from a $23 discount to $14 discount as the market priced in a much lower expected value for any forked ETHPoW tokens.  

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Implied vols are generally higher in the front, although there are again two very different stories being told here.  In BTC, as spot traded back up through $19,500 on Friday, one player bought almost 1,000 lots of 1 week options, pushing 1 week vol from 65 to 75 in quick time.  Vols dipped back over the next few hours, but as spot kept moving, they rallied again to 75%, and 1 week vol has been oscillating around 70-75 vols since.  There is a real focus on demand for gamma here, as it appears the market short BTC position is in danger of being stopped out with every rally.  The lack of interest in vega options shows that the market still believes this is short covering, and not the start of any longer term rally.  

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The ETH vol curve is obviously completely dominated by event risk around the Merge, now expected early Thursday this week, so options expiring this Friday are the shortest liquid tenor to capture the event, and are currently pricing at 115%, which compares to overnight pricing of around 80%.  The curve slopes down quite steeply for longer tenors, with 30Sep at 105 and Dec at 100, meaning roughly that forward volatility is pricing a curve which settles around 95%, or 25 vols over BTC, which looks about right given the risk.  It is worth noting that the ETH risk reversal curve peaks for puts at the October tenor (currently 9 vols puts), which makes the calls here look like rather good value, so if you do have a bullish view, it might be worth exploring the use of calls in that tenor.  

Looking ahead

We have CPI tomorrow, which will help shape views on what the Fed is going to do next week. One would expect a weak number to have the potential to create strong upward momentum in BTC. But between these two macro events, we also have the ETH Merge, which is probably going to be quite messy. Currently the market is reducing risk, which means pain to market positions: primarily short BTC and long ETH. Zooming out, one has to say the market has priced in a lot of bad macro news, and one wonders who is left to sell BTC, so perhaps a strategy of buying dips here is worth considering. In ETH, consensus is probably that it's going to trend higher after the Merge, but expect volatility in the short run, so size positions accordingly. Good luck this week.

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