● Reduced liquidity as global attention focuses on Ukraine
● After last week’s move higher, the market gave up all its gains on Friday
● APAC clients the better buyers with OTC brokers the better sellers
● In OTC, limited demand to borrow stablecoins is further steepening yield curves
● Vols surprisingly low as markets pause to absorb Ukraine implications
With everything going on in Ukraine, crypto markets feel of rather secondary importance. It is hard to think about markets in times like these, as humanitarian thoughts remain front of mind. Perhaps that is why liquidity has reduced significantly, making prices jumpy.
Ultimately the week saw crypto make a strong idiosyncratic move higher, which many interpreted as a decoupling of BTC from risk, especially equities. BTC was really the leader on this move, outperforming many other cryptos, and outperforming nearly all on a vol-adjusted basis. However, the market gave up all of the week’s gains on Friday, in a move which started during the Asian day as the Russians shelled a nuclear power plant. The initial panic may have been in fear of a nuclear threat, but the move persisted because the event focused the market’s collective consciousness on the fact that, in this war, we are all exposed to unknown unknowns which could create black swan events.
Flows over the past week show a continued preference amongst buyers for BTC over ETH; outside the majors, we have had decent buying in XRP and AVAX. Regionally, APAC has again been the better buyer, continuing last week’s trend. By client type, OTC brokers have been our best net seller, while better buying has come from exchanges and family offices.
In crypto rates, it has been another quiet week with little to go on: futures basis firmed up after the rally early in the week but has given it all back over the weekend, and 1-month basis remains around 1% on most major exchanges. On the OTC side, we are still seeing limited demand for borrowing stablecoins, which has further steepened crypto ecosystem yield curves, as liquidity providers chase bids lower and lower in the front end.
In a similar fashion to rates, we have seen few signals here that were not simply driven by spot movements: the put skew is dominating the pricing of ATM options. Vols started the week rather elevated, with March ATM vol trading around 75%, then drifted lower through the week, as spot rallied, to around 67% by Friday, before rallying again back to 75% currently. Interestingly, put skew has not become much better bid, which indicates either that the market is better positioned against severe left-tail events, or that it is focusing a little more on the risk of topside volatility. Either way, the standout feature here is that vols are really not that high at all. March ATM vol at 75% implies a daily straight line move of around $1,500.
Spot is currently showing there is positive carry in simply owning options and trading the gamma. Given the geopolitical risk, one wonders why crypto vols are not considerably higher? This suggests pent-up demand for a big move either way, depending on what happens next and the resulting headlines.
Events in Ukraine will clearly continue to drive sentiment in all markets, and we’re now in full risk aversion mode in most markets. We do have key US inflation data out on Thursday but with risk in freefall, this doesn't seem that important any more.
During periods of rising angst, expect to see EUR/USD and EUR/CHF falling; Treasury yields dropping and 2y/10y tightening; oil, gold and softs rallying, equities and crypto falling - the latter for the time being at least.
However, we do still feel that there is potential for BTC to join gold on a march higher in a risk-off environment. The deeper we are dragged into this situation, the more severe the consequences will be for the global financial system - and the greater the focus on credit and counterparty risks. There simply are few assets out there that are not anybody else’s liability.
BTC might indeed search more to the downside, but for those looking to run shorts, there are much less complicated shorts out there in equity and credit markets.
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