CryptoBits: Crypto Softer in Line with Macro; but Not Convincing as Yet

Written by
Adam Farthing


February 27, 2023

Key Takeaways

  • Crypto majors turn lower, as persistent inflation fears return, but still outperforming other risk assets
  • BTC dropped through $23,500 support level on Friday
  • Basis softer in BTC, firmer in ETH, considerably so in June contracts
  • Vol market sentiment turned as call longs threw in the towel, vol sellers took over
  • Spot/vol correlation remains positive, implies market will chase above $25k

Looking back

Crypto finally dropped last week, as persistent inflation fears returned - the 'higher for longer' scenario - but not convincingly so. On Friday BTC broke below the $23,500 support level, which it had held for a week, seemingly dragged lower by a strong dollar, falling equities and higher front end interest rates.  We had heard anecdotal evidence that there was a lack of fresh buying above $23,500, and without that, it appears that crypto may just have been following macro once again.  Equity and bond markets had been pricing in rather an optimistic outlook, so it seems that the repricing of that outlook over the past week has weighed on crypto too.  The Fed minutes showed little sign of dissent over the previous decision, but nevertheless, recent jobs and price data have proved too strong for markets to keep rallying.

Our flows have been of a similar ilk to the previous week, with better buying of BTC over ETH, a strong theme which we are keeping a close eye on as we approach the Shanghai upgrade next month.  We also had strong buying of SOL, ADA, and MATIC, and strong selling of XTZ and BNB.  Regionally, APAC buyers were again dominant, while by category, exchanges and funds were again our best buyers.

Better buying of BTC over ETH, strong buying of SOL, ADA, and MATIC, strong selling of XTZ and BNB

Futures basis has not changed much in the front dates, with BTC basis a little softer, and ETH basis a little firmer over the week, but in June the effect is more marked, with the basis up quite strongly from 5% to 8% on Binance.  We are not sure if this is somebody pre-positioning for a change in ETH momentum post-Shanghai upgrade, but it certainly could be related.

Options markets had a significant change in tone in the middle of last week.  Until Tuesday, almost all interests for blocks had been buyers of ATM or call vol, as market makers attempted to hedge shorts and fresh gamma and vol buyers kept popping up.

However mid-week, one account liquidated around 700 BTC of 24 Feb $26,000 calls, and since then, the momentum of vol buying seems to have run out of steam.  Later in the week, there was large selling of June straddles and strangles from New York, and by the end of the week, with spot well off the highs, vols were actually quite heavily offered. On Friday, we saw some heavy selling of gamma, with 1 single ticket selling 700 BTC of 1wk options, in a portfolio of $23k puts, $24k call, and $24.5k calls, and a few other large tickets of March atm vol getting sold.

Over the weekend, realised volatility dropped back to around 30%, so those sells have worked well so far.  Positive spot/vol correlation remains very clear, despite the market failing to price it in the risk reversals, which remain fairly flat for BTC, and favouring puts for ETH.

Looking ahead

If you buy into the theory that the recent crypto rally has simply been a normalisation of extreme short BTC positioning during Q4, then you would not be surprised by a lack of follow through buying in the $23,500-$25,000 area.  Such a theory would also predict that crypto may become more beholden to macro data going forward.  As mentioned, we will be keeping en eye on ETH, the upcoming Shanghai Upgrade and its impact on adoption and pricing.

This week we don’t have much from the US, but we do have China manufacturing PMIs (Wednesday), and EU HICP (inflation) data for February (Thursday).  More strong data may lead to more caution among investors worrying about higher rates for longer.

Buy/Sell Ratio by Category

Exchanges and funds were again our best buyers

Buy/Sell Ratio by Region

APAC buyers were again dominant
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