Recurring market commentary on what’s happening in the crypto markets, summarized by the Crypto Broker team at Crypto Finance AG.
So far, 2022 has been a year of mostly unattractive and low-tier pricing for digital assets. Uncertainty about the legal/regulatory framework, coupled with a hostile macro environment (inflation, Russia/Ukraine, etc.) is pushing people to stay on the sidelines and wait for events to decouple.
Correlation with traditional markets
Here are short facts about the Bitcoin correlations:
- The trading volumes of BTC and ETH are now positioned at the bottom 25% of the 5-year transactions.
- BTC has been performing as a growth-oriented risky stock for many months (30d beta and correlation with NASDAQ:QQQ are 1.19 and 0.68 respectively).
- Most cryptocurrencies are returning beta times bitcoin.
- Then again, with stable betas, pair trading and coinintegrated portfolios are attractive from a low to medium frequency trading perspective.
The BTC 1d Heikenn Ashi candles chart called a buy on the evening of Monday, April 25th, after having called a sell on April 21st as the open-close spread was very tight. Major technical indicators, both oscillatory and moving averages, are in favour of a sell. In this low volatility environment (seeing as how there are neither positive nor negative news), I am happy to buy at $38k-$39k and sell at $41k-$42k. Looking at the Volume Profile Visible Range (VPVR):
- Support: $38k-$40k
- Resistance: $47k-$50k
Delta neutral strategies
Open Interest (OI) is stable WoW, with Binance covering nearly 30% of CEXs aggregate OI. As leverage continues to be low, the 3-month annualised rolling basis is trading at 1.98% on the CME, and funding rates are negative on most exchanges with the exception of Binance.
Interesting here is getting perpetual long positions on exchanges such as FTX (1-month annualised average funding rates: -19%) and short on Binance (1-month annualised average funding rates: +35%). Over the past month, this strategy would have yielded approx 4.5% – or 54% annualised (without considering fees/cost of capital/etc.) Of course, this strategy is not without risk since the two perpetuals are not fungible. The inclusion of this strategy on the one hand therefore leaves you market neutral (BTC neutral). On the other hand, it leaves you short USDT USD, and exposed to the risk of funding rates. Also note that funding rates are paid hourly on FTX and every eight hours on Binance. It is set to be powered by 0x, a decentralised exchange liquidity aggregator.
The term structure of ATM IV is trading a little higher in the very front-end, while the back-end is almost unchanged. The overall ATM IV is still very compressed, and the IV is 50% on the front-end and 65% on the back-end. As I have said in the past, although I think buying vol now is a good deal, it is important to keep two things in mind:
- 1. Many traders/MMs are using BTC and ETH options as a proxy to hedge DOV trades, thereby compressing volatility and making historical volatility levels unlikely to be displayed again.
- 2. Time-decay on medium/long-term options is likely to eat up most of the profits.
The IV/RV spread is quite narrow and many traders are placing short strangles that hold the spot at $38k-$42k. Then again, options traders reacted to spot price actions during the week as follows:
- BTC/USD above $41k: buy OTM call spread call and diagonal calls
- BTC/USD below $40k: iron condor/short strangles and puts protection the OI profile once again suggests that $40k is a magnet. At least, short gamma positions by MMs are not difficult to manage.
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