Key takeaways
Looking back
Crypto has continued its freefall, with BTC trading an interim low just above $20k on Wednesday, staging a relief rally to $22.5k, then grinding lower, ending the week again at close to $20k. On Saturday afternoon in Asia BTC broke sharply lower through the $20k level, and traded towards a low of $17.5k, before beginning another relief rally, this time climbing to current levels around $20.5k. BTC was trading at $30.2k going into CPI data 10 days ago, so from there to the lows it gave up about 42%. The ETH lows were around $885, down 50% from $1,775 at the CPI print, and this morning we have rallied to a high around $1,150. The majors have taken the brunt of the selling as the liquidations that are occurring are on loans collateralised with BTC and ETH. As a result, alts have generally performed equal to or slightly better than the majors.
Our flow data this week shows that our buyers have been primarily from APAC and EMEA clients, with America's more evenly split. By client type, our main buyers have again been funds, with other clients showing no strong bias. Broken out by coin, our flows have shown a slight preference for BTC over ETH. We also had strong buying in ADA, MATIC, UNI; and strong selling in SOL, DOT, EOS, and AVAX.
Futures basis in BTC has dropped off during this period of weakness, but we haven't really seen the sort of weakness we would normally associate with spot moves like this. The fact is that retail/leveraged traders exited this market long ago, so the current selling is not futures, but loan collateral–which is of course physical and sold as spot. OTC lending markets are pretty much frozen for the time being, while uncertainty remains as to where exactly the credit risk lies.
In crypto options land, vols have gone up and stayed up for now. With spot very whippy, theta bills are relatively easy to pay, even off these elevated levels. BTC 1 month ATM vol was trading around 70% last weekend, but since last Monday has seen a high of 130% and a low of 80%, and is currently around 90%. However, it must be noted that ATM vols depend on where spot is trading, and with spot BTC at the recent lows, we would expect 1m ATM to be at least 20 vols higher. The following point is then all the more interesting: BTC 1m 25delta risk reversals have dropped off a lot since the end of last week. From highs around 40 vols, 1month riskies are now back down to 20 vols. The implication is that the market is pricing in the risk that spot BTC could rally $5000–if all this risk aversion passes without a huge domino effect of bankruptcies and liquidations–and drop $8000 if the liquidations do occur. In other words: the implied probability distribution of future BTC prices is becoming a lot less skewed than last week. If you disagree with that, you will be pleased to know that risk reversals are actually rather cheap relative to the outright level of vols.
Looking ahead
Not much for macro traders to get their teeth into this week. In fact, we will probably have to wait until the next CPI data in mid-July for anything macro related to actually have an impact on risk markets. In the meantime, however, there are a lot of unknown unknowns floating around beneath the surface of the crypto markets. Bankruptcies force the transfer of unknown economic risk from debtor to creditor, and at the moment, the crypto ecosystem has no lender of last resort such as the Fed in 2008 or the ECB in 2011. Good luck out there.
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