Key Takeaways

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• Major coins are down between 13-15% since last week
• Alt L1 and L2 coins (SOL, MATIC, DOT, AVAX) are all off 15-20%
• LUNA is off 27%; as the market tested the USDTerra stablecoin peg over the weekend
• Futures basis are at a low point for the year and multiple perp funding rates are negative
• Implied vols very volatile last week, with curves backwardated and vols rallying

Looking back‍

In last week’s Cryptobits, we felt the market was in a period of calm before the storm, but we certainly didn't foresee what has since played out. It has been a truly fascinating, if not tumultuous, week in crypto.  Crypto moved higher after the Fed’s announcement and continued to rally alongside equities immediately afterwards, with BTC actually touching $40k. This sudden upwards move was caused by macro traders breathing a collective sigh of relief that Powell had ruled out undertaking any 75bp moves.  Yet a day later the market simply collapsed without any warning or trigger, retracing the entire rally, and taking out the $37k support level in BTC in the process.  ETH outperformed BTC on that move, implying once again that the selling was probably from macro traders, who are more likely to hold BTC than ETH.

Since then, the market has continued to sell off in an orderly manner, reaching lows so far at just above $33k in BTC and around $2,400 in ETH, both down around 13-15% on the week.  Most other coins are down 10-20%, although LUNA has taken a 25%+ hit, dropping below $60 today.  Over the weekend, LUNA spiked lower as nervous whales removed assets from their ecosystem by cashing out of USDTerra into other stablecoins, creating sudden gluts in supply of LUNA.  USDTerra traded as low as 0.98, but so far the algorithmically controlled peg has held.

Our flows this past week have been balanced in the majors, though we have seen better selling in SOL and MATIC, and better buying in AVAX.  Regionally, our better buyers were again APAC and EMEA accounts, with Americas clients more inclined to sell.  By client type our standout buyers were banks, which we feel was possibly sticky, long-term holder flow.  

The lend-borrow market remains slow and futures basis is at the year’s lows, with 1 month basis trading around 1% over spot on most exchanges.  Late last week, during the initial part of the sell off, perps basis went negative for most large coins, which effectively meant the market was paying to borrow crypto, a rather unusual situation on crypto, and therefore significant.  Also perhaps worth noting that we are starting to see interest from miners for debt financing, as their share prices have moved low enough to make fresh equity financing unattractive.

In options, vols have had some decent moves over the week.  Front end vol was paid up hard in the hours leading up to the Fed, with 06 May options trading from 52% up to 64%, before selling off 10 vols again directly after the fed.  However they rallied again back to the low 60”s as the market collapsed on Thursday, then on Friday vols simply got crushed as the market priced in the DoV auctions, where one major protocol sold about 45,000 lots of 1wk $2,400 ETH puts. With that kind of over-supply hanging over the market, it takes a bit of work to get vols moving higher, so it’s worth noting that both crypto vol curves have inverted into backwardation today, BTC much more aggressively, with BTC ATM vols are up by 5.5 vols to 64% in July and by 3 vols to 63.0% in Sept.

Looking ahead

‍The focus this week will be on US CPI data to be announced on Wednesday.  The market expects a lower headline number this month at 8.1% YoY (cf 8.5% in March), which would be the first slowdown since last summer.  However, the key this time is likely to be the core CPI number, which strips out food and energy prices, and is made up with about 40% from shelter costs.  With double digit rent increases being reported, this would cause a political issue, and could cause markets to price in potential for the Fed to get more aggressive with rates, which could increase downside risks to asset prices.

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