CryptoBits: Market Hunts for Fresh Theme after Stable Week

Opinions

Written by
Adam Farthing

Published

May 23, 2022

Key Takeaways
• A ‘sideways’ week with participants focusing on risk reduction
• Majors are stuck in 28,750/30,750 and 1,900/2,100 ranges
• Perps: extreme negative funding rates are easing
• However, the OTC lend/borrow market is still seeing residual demand for altcoin borrows
• Vols: their reduced propensity to rally on spot weakness implies positions are under control
• Q3 and Q4 ETH call spread buying is perhaps an indication of the next big market theme: the ETH Merge play


Looking back
The week helpfully gave the crypto market a chance to re-assess risk and address position imbalances. Spot has been range bound and rather slow, with better liquidity becoming available in the majors. However, liquidity in other coins remains patchy, indicating a much reduced level of retail participation. Earlier in the week, vols were reacting to any spot weakness by rallying sharply, but by the end of the week, as spot dipped on Thursday in New York hours, it felt as if spot would have to break through the lower end of its range to get vols back on the front foot.

Flow-wise, our clients have been better buyers of both BTC (53.1%) and ETH (52.6%); we have also seen better buying (over 55%) in ADA, LINK, DOT and XLM; and better selling in AVAX, BNB and UNI.  By client type, we have seen strong buying from funds and banks.  By geography, APAC and EMEA have been better buyers; Americas more balanced.

We saw better buying in both majors, and in ADA, LINK, DOT and XLM; and a bias to sell AVAX, BNB and UNI.

The OTC lend-borrow business remains slow, but at least we have seen the return of some liquidity. Rates had risen after the LUNA blow-up as market makers hoarded liquidity, and now those higher rates have attracted capital into the market, bringing rates slowly lower again this week. There was strong demand to borrow alt-coins until late last week, but with perp negative funding rates somewhat abating, the OTC demand for these borrows is also softening.  Term futures in BTC and ETH have not moved much on the week, with 1-month basis 1-3% and 3-month basis 3-4% on major exchanges.

Option vols have overall continued to trend lower, especially in the front, as realised volatility has been so low, while the back has held up better as it is less well supplied by DOVs, and of course, back end vols are now pricing in a much higher risk premium in the medium term. The BTC curve is now back in contango, with the front at 68, and the back end quite flat at 71, down 13 and 3 vols respectively basis 1-week and 3-month ATM vol. Risk reversals have finally come off a little, with 1-month riskies trading down 4 vols to 12 vols for puts. In ETH, there has been continued interest to accumulate back end calls and call spreads, implying that the ETH Merge play may be the next big theme for crypto.

Looking ahead

The main data point from the US this week will be the PCE inflation data out on Friday, although PMI data on Wednesday will also be keenly watched.  That apart, the market is on the lookout for a relief rally, and  while crypto has been under pressure recently, in FX markets the US Dollar has also had a bit of a pullback.

Regionally, EMEA and APAC were again the better buyers.

Our strongest buyers were funds and banks.

About B2C2

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