As equities brush off inflation fears to continue on a record bullish streak, crypto markets test trader’s patience after 58 days in the $30–40k range. The market has reached an equilibrium of bullish and bearish drivers as retail sentiment continues to fatigue and bigger players remain patient amid weak price action and regulatory headlines.
The main narrative alongside the rangebound market has been Eastern de-risking, off the back of Chinese mining and regulatory crackdowns, versus Western institutional adoption as traditional players such as Marshall Wace, Point72, and Andreessen Horowitz announce plans for increasing their crypto exposure and offerings. The absence of retail reinforces the sideways market, with most social activity metrics down -70% from May.
Even in the West we have seen a balance of bullish and bearish headlines, with significant valuations for crypto companies such as Circle ($4bn) and Bullish ($9bn) coming at a time when regulators debate increased pressure, with Binance taking most of the heat.
Below we take a look at some of the current market factors in more detail:
Options traders bet that we maintain the current range, 30k as key support
· Almost all of the volume over the past weeks has been contained to strikes in the current range — 30k puts and 36k calls with July expiries have seen the most demand, which would suggest that options traders are expecting the current range to stay for the foreseeable future
· Whilst we currently sit at the lower end of the range (currently 32k), we’ve still not seen a significant increase in put strikes below 25k, again suggesting that the market is relatively confident in 28–30k being a strong support
· The current price action is clearly reflected in implied vol falling from highs of 130% in May to now levels of 75%, with realized even lower at 60%. The backend of the curve shows expectations for vol to return later in the year, with ATM IV pricing 20% higher for Sept-21
· ETH mostly mirrors what we are seeing on BTC, with the majority of volume trading front expiries in the current range. However, ETH has also shown some interesting moves further down the curve as $5000 Dec-21 and $6000 Mar-22 calls have seen an increase in volume
Derivatives market remains quiet, funding rates and futures structure show slight bearish bias
· Funding rates for futures have been consistently flat to negative for over a month now, reflecting the relatively bearish sentiment as traders who are short futures are paying longs a funding fee. Whilst annualized rates of -0.05% are not huge, it’s a significant change from levels of +30–40% we saw in May when demand was strong
· Futures structure shows the same lack in demand, with the 3 month basis falling to 3% from highs of 25% in May. Watching these metrics will be a key sign of sentiment shift if the market starts to test levels outside of the current range, as a sustained rally will likely be driven by an increase in demand for spot
· Additionally to the above point, derivs volumes and open interest are down -40% from previous months, and therefore the possibility of a short/long squeeze breaking us out of this range is also reduced. Overall, liquidations are down significantly since May
Global factors remain supportive of risk, crypto/equity correlation turns negative
· US equities continue to set new all-time-highs on an almost daily basis, with tech leading the way from solid gains in Amazon, Tesla, and Google. Despite strength in equities, crypto has remained weak, with the correlation now turning negative for the first time this year.
· The reaction to Wednesdays higher than expected CPI print gave a strong signal of market expectations for risk-on assets, with an initial selloff in both equities and bonds that was quickly reversed to then close up on the day, with the market now pricing in the first rate hike for Dec-22
· Whilst inflation will continue to be the main macro concern moving forward, the flattening of the curve (5yr yields up, 30yr yields lower) and the fact longer end rates are still in rock-bottom territory shows that for now the market is still trusting the FED
