Flow Analysis

Crypto rallied early last week, possibly because the Fed didn't raise rates, and certainly due to news that Russian troops were being withdrawn. By Thursday it became clear that the latter was fake news, and BTC dropped $3,000 during the London day. Since then it has always felt weak, and on Sunday we dropped another $2,000 on no real news, just a lack of liquidity on the bid side. In Asia today we rallied back above $39,000 on news that Putin and Biden may have a summit, and so begins another week of headline trading.

Our flow analysis shows that clients had a relative preference to buy BTC over ETH, better buyers of XRP, SOL, MATIC, AVAX, EOS and UNI, and better sellers of ADA, LINK and LUNA.  Regionally, APAC and EMEA have been better buyers. By client type, funds, exchanges and retail brokers were better buyers.  

Futures basis has not done much over the week, and we haven't seen much on the OTC funding side either.  Current 1-month annualised basis is around 1-2% on most exchanges, and demand for USD/stables remains tepid.

Crypto vols and risk reversals dropped to low levels mid-week, with June BTC ATM vol printing a low at 62 vols, as Ukraine sentiment improved.  This is a historically low level, which is quite surprising, given the current high level of geopolitical risk, and also the fact that realised volatility is currently no lower than implied volatility.  The net result is that, in this time of heightened geopolitical risk, there is no risk premium (no negative carry) to owning options and trading gamma. The implication is that the market is well supplied with options, and given most of the new supply is coming from DOVs, one could argue that the oversupply is all calls.  As a result, if spot drops and moves away from those strikes, one would imagine the market could suddenly feel rather short volatility.  Expect vols to react violently to spot weakness over the next week.  

This week the market will focus on US housing data (Tuesday and Thursday), GDP (Thursday) and durable goods and PCE price data (Friday).  Those data apart, all eyes will be on the tapes, as the situation in Ukraine remains key for risk right now, and currently crypto remains a risk asset.  That said, we will be on the lookout for signals that this might be changing for BTC.  Our feeling is that in a strongly risk-off environment, BTC/USD correlation may flip to positive, as has recently happened with gold.  We are certainly not predicting this, but will be sensitive to signals that it might be happening - if it were to, it would be a seminal moment for Bitcoin and would have the potential to send the vol market into the stratosphere.  

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