Market Insights
Article by Elisha
Crypto markets have taken a nosedive with BTC trading to 21,900 (-31% from last week’s high) and ETH to 1,163 (-40% from last week’s high).
This breakdown was triggered by a combination of factors:
1. High inflation numbers on Friday evening was the trigger for the move. US CPI rose 8.6% year-on-year, higher than the market’s expectation of 8.3%.
A massive disappointment for the market which is now fearful of even more drastic Fed tightening. There are talks of a 75 bps hike at the FOMC meeting this Wednesday.
Both the S&P and NASDAQ have also broken below last month’s low.
2. Potential Celsius insolvency. Rumours about the major borrow/lend player defaulting were swirling around over the weekend, placing tremendous bearish strain on prices that were already weak from Friday’s CPI numbers.
The rumours were confirmed on Monday in Asia morning when Celsius suspended withdrawals, sending prices to the lows.
We have been expressing concern about the collapse of a significant credit player since the LUNA blowup. The market is now panicking about the impact and contagion if Celsius becomes insolvent.
Some key liquidation levels that the market is looking out for are 1,150 in ETH, 0.8 in stETH/ETH and 20,000 in BTC. We are getting uncomfortably close.
Some of the positions/biases we had on from last week underperformed:
a. Bias long spot was clearly wrong.
b. Risk reversals (buy call/sell put) have gone even more negative. Frontend BTC skew is at -34% and ETH at -50%! The huge demand for downside vol on the desk will likely keep the skew deeply negative. Today alone, 12,000x of BTC June 15,000 strike puts and 60,000x of ETH short-end 1,000-1,200 strike puts went through.
c. Steepener (short front-end, long back-end) trade has gone the other way, driven by a frontend vol spike. 1-week BTC vols higher from 74% to 124%, and ETH from 95% to 175%.
These are really attractive levels for a steepener we’ve actually added to the position. We expect the curve to flatten out very quickly if/when spot prices stabilise.
Fortunately, two key positions overshadowed the bad calls and allowed us to ride this down move well.
i. Long wings (far-strike options) performed well given the very sharp move.
ii. Long both vega (longer-term options) and gamma (shorter-term options). We were particularly long downside gamma as we scooped up a large chunk on Friday before and after US CPI.
We’ve been taking profit on some of the long gamma after the weekend. However, we are keeping long vega and gamma into FOMC on Wednesday.
We have also flipped to trading our deltas (spot position) on the short side. Deleveraging moves like these tend to overextend and test the maximum pain threshold of the market before stabilising.
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