Market Update

BTC has been trading in a 53,500 – 58,000 range since the big run-up last week. It’s also been noticeably outperforming ETH and most altcoins.

In spite of the numerous liquidation-driven dips, the 54,000 TD Support Trend level has held very well (Chart 1). A clear underlying sense of optimism as the market awaits SEC’s decision on the BTC ETF applications starting next week.

Chart 1

Funding and forwards have also been heating up over the last two weeks since SEC chair Gensler made favourable comments about a futures-based BTC ETF. Perpetual swap funding went from slightly negative in the end of September to around 20% now. The highest point of the forward curve is in October at over 16% while the rest of the curve slopes down towards 12% in September 2022. The elevated front-end is clearly pricing in the expectation of BTC ETF approvals.

In our previous post, we highlighted the CME futures premium over the other exchanges as an unusual occurrence and a sign of institutional interest. This has persisted and was clearly driven by Gensler’s comments (Chart 2). Two reasons driving the CME premium:

Chart 2

1. ETF approval would be positive for BTC, creating institutional demand.

2. CME Futures would be the focus of these ETFs.

The move in CME futures basis has also dragged the futures premiums higher across the board (Chart 3).

Chart 3

A lot hinges on the Pro-shares ETF decision on Monday, with their application being the first and widely expected to get approval.

As the ETF decisions are underway, we expect BTC to remain the focus of the crypto market.

With the limelight on BTC, we’ve been hearing groans about the stagnation of the defi market in the last few weeks. But we’ve actually been extremely excited about the new phase of growth in the defi market.

Ribbon Finance in particular has introduced a very scalable hybrid model where investment, settlement and price discovery are performed onchain while risk is managed offchain. The growth possibilities with this model for options and other non-linear products could ignite a second defi summer. The market clearly agrees with us, valuing the project at $9 billion upon the token listing last week!

Direction-wise for BTC, we find ourselves with a bullish bias but unable to form a strong bullish conviction in spite of the clear optimism in the market. A few reasons for this:

1. Front-end risk reversals remain skewed to the downside (ie puts are more expensive than calls – Chart 4) and the put skew has actually deepened with spot moving higher. A reflection of prevailing downside nervousness in the market.

Chart 4

2. We are wary of a ‘buy the rumour, sell the fact’ situation with the upcoming ETF approvals.

3. The 2-day chart will likely form a TD Sequential 9-13-9 sell signal into the weekend (Chart 5).

Chart 5

We’ve turned neutral on BTC and ETH spot delta while remaining long in BCH, DOGE, ALGO and SOL.

Vol-wise, our long BTC gamma against short ETH gamma continued to perform very well with BTC spot headlining the price action.

Short vega has not performed as well. A slew of call buying pushed front end vols higher from 78-86% (Chart 6).The desk saw over 1,000x of end Oct 65k Calls being bought the day before, coupled with December topside demand as well as a bunch of in-the-money call spreads.

Chart 6 

We are keeping our short vega position in BTC against long vega in the alts. More importantly, we are turning long gamma across the board (with a special focus on owning downside in BTC) in anticipation of increased volatility in the coming weeks.

Our focus on altcoin options this week has been on SOL. Price has come off the highs and is consolidating in a triangle wedge pattern (Chart 7). We have been keenly accumulating vega expecting a breakout of this wedge as we head towards the Breakpoint conference in November. We are sure the Solana team will have some surprises for us there.

Chart 7