Crypto broke out through the downside of its trading range on Friday morning in Asia, succumbing to souring global risk sentiment caused by Russian war-mongering, implicit Chinese support for Putin, and ever-present concerns about equity valuations, rate rises and inflation. BTC and ETH are now both in the middle of their old May-Aug 2021 ranges ($29,000-41,000 and $1,800-2,900), so it's hard to call direction right here. SOL and MATIC have both taken it particularly badly, falling 30% and 25% respectively from previous lows.
Our flow data have continued to indicate that retail are still the buyers, which is interesting as we have yet to see the sort of leveraged washout that has characterised large sell-offs in the past. Family offices (again) and OTC brokers have been the better sellers. In terms of coins, we have had strong selling interest for SOL, DOT and LNK, and have seen better buyers of XRP, XLM and BNB. Regionally, APAC has provided the buying while the Americas have been the better seller.
Funding rates in crypto markets have fallen again, as many of our regular borrowers have allowed trades to roll off; we are also finding fresh short-term lending from counterparties who simply have no plans to deploy cash into risk. However, it should be noted that there has been no big collapse in futures basis, with the 1-month basis effectively dropping from 5% on Friday to 2-3% now. The market does not feel excessively leveraged.
Vols have snapped higher in the front end, with 1-week vol up 15 vols in BTC and 20+ vols in ETH since Thursday. Put skew is also strongly bid, with 1-week 25 delta risk reversals at 10 vols in BTC and 12 vols in ETH. Given realised vol has been an underperformer for quite some time, and that we feel the market is not particularly leveraged, one would suspect that the vol markets may have priced in the risk of further downside.
This week will probably be all about two things: the Ukraine situation and the Fed on Wednesday. And the question is not really about what happens, but what the market has priced in already. On the latter, it does feel that the market is already spooked, with people talking about extreme scenarios such as a 50bp hike in March, 6 or even more hikes this year, and an immediate cessation of asset purchases. On the former, people are considering it a foregone conclusion that Putin has played his hand wisely, found the West napping, and will invade and take over Ukraine. With that in mind, and looking at the price drawdowns we have had since November in crypto, one could be forgiven for looking to build medium-term length around these levels.
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