Summary: While TradeFi billionaires appeared to be in hibernation while Bitcoin traded below $30,000 – with the recent price increase, those billionaires are back in the media and emphasizing Bitcoin’s value as a store of value or, in the case of Larry Fink, Bitcoin’s attractiveness as a flight to quality. The price performance of traditional “flight to quality assets” has been the opposite of what many old- school traders would have expected. Bitcoin was the best “flight to quality asset” after the Russian Invasion of Ukraine on February 24, 2022. Bitcoin’s best days might still be ahead, especially if the world is heading for war.

Analysis

In 2012, BlackRock CEO Larry Fink started the shareholder activism war against companies perceived as facilitating climate change. Ten years later, 11% of BlackRock’s funds had a defined ESG target (environment, social, and governance) – roughly $1 trillion in their assets under management. BlackRock’s impact on the investment management world cannot be underestimated.

Mr. Fink has called Bitcoin’s recent rally a “flight to quality,” with “pent-up interest in crypto from clients worldwide about the need for crypto.” Since BlackRock’s ETF application in mid-June 2023, he has frequently returned to the media and promoted Bitcoin. This has and will significantly impact the acceptance by TradeFi investment managers to use Bitcoin in their multi-asset portfolios.

In May 2020, when a Bitcoin traded for less than $8,000, billionaire Hedge Fund manager Paul Tudor Jones called Bitcoin the “fastest horse” in an environment of expected inflation due to excessive fiscal stimulus. Mr. Jones trail-blazed for other investment managers to put Bitcoin into their portfolios, and the result was a nearly 700% increase in the price of Bitcoin. Other Hedge Fund managers followed his chorus – from Stanley Druckenmiller to the family office of George Soros.

And while those TradeFi billionaires appeared to be in hibernation while Bitcoin traded below $30,000 – with the recent price increase, those billionaires are back in the media and emphasizing Bitcoin’s value as a store of value or, in the case of Larry Fink, Bitcoin’s attractiveness as a flight to quality.

This “flight to quality” appears to have ignited to an incredible +28% Bitcoin return in October, outpacing the +22% expected return based on the average 10 years of returns for October. This year, most of the returns occurred after October 13. The date coincides with when U.S. President Biden was expected to ask U.S. Congress for another $100 billion to finance the support of another war.

The Russian invasion of Ukraine occurred on February 24, 2022, and after more than eighteen months, there is no end in sight in human suffering and financial support for the war. The Biden administration has, so far, committed at least $75 billion in assistance to Ukraine, and many fear that another conflict in the Middle East could continue to drain the U.S. balance sheet.

But the price performance of traditional “flight to quality assets” has been the opposite of what many old-school traders would have expected – namely, Bond and Gold prices higher and the US Dollar-Japanese Yen (USD-JPY) exchange rate lower.

One week after the Russian invasion, US 10-year Treasury Bond (prices) rallied by 6% [we are using the Simplify Intermediate-Term Treasury Futures Strategy ETF as a benchmark]. Gold prices were also only +1% higher. At the same time, the traditional safe-haven currency pair USD-JPY was higher – instead of traditionally being lower. Undoubtedly, Bitcoin was the best “flight to quality asset” after the Russian Invasion of Ukraine on February 24, 2022.

When Hamas attacked Israel on October 7, 2023, the Gold and Treasury Bonds rallied while the USD-JPY exchange rate fell again. The currency market has wholly lost its safe-haven asset, and this is a significant development as many former currency traders have become Bitcoin traders, and adding Bitcoin to investment banks’ foreign exchange trading desks is the most natural progression on the TradeFi side. Twenty-five days after the Hamas attacks, the Bitcoin price is up +24%.

With BlackRock as the world’s largest asset manager supporting Bitcoin and TradeFi billionaires returning from hibernation, we can assume that Bitcoin will be used increasingly as a flight to safety or as a safe-haven asset. Bitcoin’s best days might still be ahead, especially if the world is heading for war.

Disclaimer

This article reflects the personal views of its author, not Deribit or its affiliates. Deribit has neither reviewed nor endorsed its content.

Deribit does not offer investment advice or endorsements. The information herein is informational and shouldn’t be seen as financial advice. Always do your own research and consult professionals before investing.

Financial investments carry risks, including capital loss. Neither Deribit nor the article’s author assumes liability for decisions based on this content.

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Summary: The anticipation of the Bitcoin Futures created a massive wave of TradeFi adoption expectations and caused Bitcoin to rise by +288% from when the CME announced the upcoming launch until the futures started trading. With an RSI of 89%, Bitcoin was overbought earlier this week but the historical comparison shows that Bitcoin rose +52% over the next sixty days when Bitcoin was similarly overbought as currently. Overbought situations tend to attract more Bitcoin buyers.

Analysis

Bitcoin is overbought! Should traders take profit?

Earlier this week, Bitcoin’s perp funding rate increased to +39% annualized and at- the-money implied volatility levels exploded as some traders scrambled to hedge their positions while others experienced FOMO. But can markets rally higher?

Let’s look at the situation in 2017 which might be analogous to the current one:

On October 30, 2017, the Chicago Mercantile Exchange (CME) announced its intention to launch the Bitcoin Future in Q4 of that year. Bitcoin traded at 6,767 at the time and while Bitcoin was overbought as measured by the relative strength index (RSI) which printed 79%, prices continued to climb higher over the next few weeks – and months.

The RSI aims to determine the strength and weakness of an asset, and it is widely believed that a reading below 30% signals that a stock, a currency, or a cryptocurrency is oversold, while a reading above 70% signals overbought. Most market participants believe that a period of consolidation is ahead when the signal is above 70% – overbought – as happens frequently in the stock market. But the stock market has natural sellers, like pension funds who are often seen as value investors that rotate constantly out of expensive into cheap stocks and have the time to wait it out when they are premature with their decision.

Not in the crypto market, nobody has time here, and value investors are hard to find.

Indeed, the Bitcoin market is very different as higher prices attract more buyers and Bitcoin tends to rise even further. By November 30, 2017, Bitcoin had climbed to 10,975 with an RSI of 84%, when the CME announced that Bitcoin Futures would start trading on Monday, December 18, 2017. Bitcoin rose further to 19,497 on December 14 and the RSI began to fall to 75%. The anticipation of the Bitcoin Futures created a massive wave of TradeFi adoption expectations and caused Bitcoin to rise by +288% in less than three months.

While the Bitcoin ETF by BlackRock (and others) is also highly anticipated, the narrative appears to mimic the CME Bitcoin Future launch. This is why we could argue that Bitcoin might continue to rally until the US-listed Bitcoin spot ETF starts trading, and any announcement of the launch date might cause a parabolic price rise.

During the last few days, we have seen the impact as Bitcoin rallied +10% on a sketchy approval announcement – imagine what will happen when the real SEC approval is released into the market.

The table below shows Bitcoin returns when Bitcoin’s RSI climbs above a certain threshold for the first time in a month. For example, when Bitcoin’s RSI rose above 90%, Bitcoin was up by +18% over the next ten days and +26% over the next 60 days. Since 2016, we have had four events, with three showing positive returns and only one showing a negative return after 60 days.

Earlier this week, Bitcoin’s RSI climbed to 89%. This would make the ‘85% RSI’ bracket the most relevant, according to the table (below). The historical comparison shows that this has occurred nine times with eight of those times prices being higher. Bitcoin rose by +20% ten days later and +52% sixty days later, on average. These are still very good odds that suggests Bitcoin could climb higher during the next few weeks and months.

So any profit-taking at current prices or because the SEC suddenly announces a Bitcoin ETF that would start trading two-to-three months later appears pre- mature based on the 2017 CME Bitcoin Future analog AND also because an overbought situation appears to favor the odds that Bitcoin would rise even further.

Disclaimer

This article reflects the personal views of its author, not Deribit or its affiliates. Deribit has neither reviewed nor endorsed its content.

Deribit does not offer investment advice or endorsements. The information herein is informational and shouldn’t be seen as financial advice. Always do your own research and consult professionals before investing.

Financial investments carry risks, including capital loss. Neither Deribit nor the article’s author assumes liability for decisions based on this content.

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Summary: Bitcoin moves in 10,000-point increments, and the decisive break above the 30,000 level would project that prices would rally to 40,000 before they find the next significant level of resistance. Bitcoin’s 28,000 strike calls for the October 27, 2023 expiry – which we repeatedly recommended – have exploded in price, with roughly a 31x return within two weeks. As we wrote last week: FOMO is BACK. Do not miss out on this new bull market.

Analysis

In the bigger picture scheme of things, Bitcoin moves in 10,000-point increments, and the decisive break above the 30,000 level would project that prices would rally to 40,000 before they find the next significant level of resistance. The old trader acronym, ‘The Bigger the Base, the Higher the Space’, comes to mind as Bitcoin consolidated between the 20,000 to 30,000 level during the last 18 months, and historically, those breakouts often predicted unbelievable upward momentum.

We would advise against fading this rally as Bitcoin could only have started to gather momentum – the pain trade is higher.

While we have been irresponsibly bullish into October (see our previous reports: October 20, October 17, October 3, and September 29), the perfect chart-technical setup would be to retest the 30,000/30,500 breakout level and shake out the weak hands – or the traders that bought on FOMO during the last 24 hours. The Bitcoin rally is far from over, and the big institutions are coming. There is no doubt about that. From the moment the BlackRock Bitcoin ETF gets approved to the day it finally gets launched, Bitcoin might make another meaningful climb higher. The blueprint was the 2017 Bitcoin Futures launch, which caused Bitcoin to rise parabolically.

As expected, the Bitcoin 28,000 strike calls for the October 27, 2023 expiry have exploded in price. A few weeks ago, those calls traded between $220 and $400 when we repeatedly recommended them, as their implied volatility was as low as 30%. As Bitcoin entered the October period, we tended to be extremely bullish. With the expectations rising that a BlackRock Bitcoin ETF would be approved, those calls traded as high as $6,961, and implied volatility was priced at 188%. This is roughly a 31x return within two weeks.

On Friday, October 20, 2023, we warned that ‘FOMO is back! Crypto Traders Are Panicking,’ and today we saw the funding rate blow out for Bitcoin and Altcoins, notably Ethereum and Solana. Panic was hitting the market. By some estimates, $310m worth of Bitcoin shorts were liquidated after news was published that the Depository Trust & Clearing Corporation (DTCC), which clears and settles ETFs through its automated creation and redemption process, had listed the BlackRock iShares Bitcoin Trust. This signified that SEC approval could be imminent for BlackRock’s Bitcoin ETF.

In that Friday, October 20, note, we also wrote that Bitcoin would jump 10-20% whenever the approval materialized, and the only way to capitalize properly was to use upside call options. Leverage and convexity is your friend when the market moves.

Bitcoin is up +10.6% during the last 24 hours on massive volume. The Crypto market cap jumped to $1.25trn and 24-hour volume increased to $82.5bn – a +97% increase from the week before. Bitcoin itself traded $47bn, a +61% increase from the week earlier, and Bitcoin’s dominance has continued to jump forward and now accounts for 53% of the overall crypto market. Bitcoin’s perpetual futures funding rate jumped to a multi-year high of +39% (annualized), indicating that longs are willing to pay shorts. This is FOMO – as we predicted a few days ago.

The smart traders will now roll their upside calls into call spreads. This would remove some of their exposure through lower delta exposure and lock in PnL. The relative strength index (RSI) prints at 99, the highest level we have seen as Bitcoin exploded relatively quickly. Some consolidation could be ahead, and call spreads are the appropriate strategy to keep upside exposure but lower the capital at risk. Do not miss out on this new bull market.

Disclaimer

This article reflects the personal views of its author, not Deribit or its affiliates. Deribit has neither reviewed nor endorsed its content.

Deribit does not offer investment advice or endorsements. The information herein is informational and shouldn’t be seen as financial advice. Always do your own research and consult professionals before investing.

Financial investments carry risks, including capital loss. Neither Deribit nor the article’s author assumes liability for decisions based on this content.

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Summary: The signs were all there; we are unsurprised that Bitcoin is up +8.5% this month. Many traders are starting to have FOMO – fear of missing out. October tends to be bullish for BTC; prices broke out of the July-September downtrend on September 29, and the Fed has paused since July, which is historically bullish for BTC. When the Bitcoin ETF approval comes, BTC will likely jump by 10-20% within a few hours.

Analysis

Bitcoin is following precisely the roadmap we presented in our previous ‘Crypto Researcher’ insights.

On September 28, in ‘ October’s Wild Bitcoin Ride – Top Catalysts Revealed,’ we showed how October tends to be bullish, and BTC is up a respectable +8.5% month-to-date. On September 29, our note ‘Bitcoin on the Verge of a Massive Breakout?’ showed that BTC broke above its July to September downtrend and confirmed our October bullishness. On October 3, ‘Buy the Fed’s “Pause” But Sell the Fed’s “First-Rate Cut,” we concluded that the last time the Fed paused (in January 2019), BTC rallied from 4,000 to 13,000 during the next seven months. While we were not calling for a rally of similar magnitude, we expected a sizeable move higher, nevertheless.

During the last few days, Bitcoin prices have been squeezed higher – we are not surprised – and expect this to be an ongoing process. On Tuesday, October 17, we explained in ‘Bitcoin ETF Green Light – Anticipated $16-24 billion Surge!’ that approving a Bitcoin ETF would push BTC prices toward the 33,100 to 37,500 range. This was based on our fiat into crypto inflow models, and we used Tether’s market capitalization (cap) as a proxy for the impact of the potential onramp. In our bullish scenario, where 30% of the Gold ETF market cap would be moved into the Bitcoin ETF, BTC prices would lift to 42,000.

From the macro side, we are even more confident that the Fed will remain on hold for the next two quarters before they might cut. First, the rise in 10-year treasury yields is now doing the tightening for the Fed, and several members of the Federal Reserve decision-making circle have acknowledged this. Second, Fed Chair Powell, speaking at the Economic Club of New York on Thursday, October 19, gave a robust verbal indication that the Fed will pause for the foreseeable future. After his remarks, interest rate derivatives are priced with less than a 30% chance of another hike this year. History has shown that when the Fed has finished its hiking cycle, Bitcoin tends to rally.

BTC will likely retest the 30,000 level within the next few days and then target the year-to-date high at 31,500, achieved on July 13. This date coincides with the landmark legal victory for Ripple Labs Inc. as a U.S. District Judge ruled that Ripple Labs did not violate federal securities law by selling its XRP token on public exchanges. This was seen as a partial win for Ripple – the emphasis here is on ‘partial’, and when the market realized this, it gave back the initial +74% rally in XRP tokens.

Last night, the U.S. Securities and Exchange Commission (SEC) dropped claims against two Ripple Labs executives in its lawsuit alleging Ripple Labs violated U.S. securities law.

This SEC decision will carry the positive momentum and build upon the positive news flow around a potential Bitcoin ETF approval. Expectations were high for the third week of October when the second deadline for several Bitcoin ETF applications was due. The next round will be in January 2024 unless the market is greeted with an early approval.

There is no doubt that BTC is taking advantage of the favorable macro condition and the pause in interest rates, and as the momentum keeps building up for the ETF approval, traders should use any dip to roll up their BTC calls into ever higher strike prices. When the approval comes, BTC will likely jump by 10-20% within a few hours – unless prices are already pushed into those ranges (33,100 to 42,000). Bullish positioned traders could benefit enormously – other traders might sit on the sidelines, tortured by FOMO…

Disclaimer

This article reflects the personal views of its author, not Deribit or its affiliates. Deribit has neither reviewed nor endorsed its content.

Deribit does not offer investment advice or endorsements. The information herein is informational and shouldn’t be seen as financial advice. Always do your own research and consult professionals before investing.

Financial investments carry risks, including capital loss. Neither Deribit nor the article’s author assumes liability for decisions based on this content.

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Summary: This week’s price action revealed that there will be enormous buying power of $8-24 billion unleashed into Bitcoin once the ETF is approved. For every $2 billion of inflows – as measured by the change in market cap for the stablecoin Tether, we see a statistical relationship of a +4% rally in the price of Bitcoin. BlackRock is not waiting for anybody else to eat their (Bitcoin) lunch – neither should you.

Analysis

BlackRock lost the fight for the most valuable Gold ETF years ago, and they are doing everything to make sure this will not happen to the next digital Gold – Bitcoin – as it becomes inevitable that the US Securities and Exchange Commission (SEC) will approve an exchange-traded-fund (ETF) based on Bitcoin spot prices.

State Street Advisors launched the SPDR Gold Shares ETF (GLD) on November 18, 2004, when an ounce of Gold exchanged hands for $400. Today, an ounce of Gold is worth $1,930. BlackRock launched the iShares Gold Trust ETF (IAU) two months later, on January 21, 2005. But despite iShares offering a competitive product with a meager expense ratio of just 0.25% (vs. SPDR’s 0.4%), the iShares Gold Trust ETF has only a market capitalization of $25bn vs. SPDR Gold Shares ETF of $56bn.

Those two ETFs have captured a combined value of $81bn. That number is critical. It doesn’t matter who wins the Bitcoin ETF race. Instead, we care about how much inflows we see in Bitcoin.

As Bitcoin offers a hedge against excessive money printing, especially as the US government appears to be somewhat on the loose fiscal side, we can assume that Bitcoin as an asset will continue gaining ground. Notably, a macroeconomic distinction exists between an inflationary hedge (Gold) and a monetary investment (Bitcoin). As a recession looms in Europe and US inflation appears to be in check, the money printing machines will eventually be switched on again, which is when Bitcoin will thrive. No matter where you stand on this inflation/deflation question, having exposure to both might be a worthy hedge.

It is fair to assume that 10-20% of those Gold ETF holdings would be switched to Bitcoin – which has been a monetary hedge since its existence fourteen years ago. Those potential $8-16 billion inflows into Bitcoin could significantly impact Bitcoin. When we compare the change in market capitalization of the largest stablecoin, Tether, with the price of Bitcoin, we can see robust statistical relevance. For every $2 billion of inflows – as measured by the change in market cap for the stablecoin Tether, we see a statistical relationship of a +4% rally in the price of Bitcoin.

Based on Tether’s market cap, Bitcoin is precisely at the level where it should be (28,664). Adding $8 billion (through potential ETF flows) would lift our fair value to 33,100, while adding $16 billion could see Bitcoin prices rallying to 37,500. According to our model, the bullish scenario would see 30% of those Gold ETF holdings move over to Bitcoin, and the digital gold would then be worth 42,000.

Monday’s ‘false alarm’ that the SEC had approved BlackRock’s Bitcoin ETF temporarily sent Bitcoin prices +10% higher. The 28,000 strike calls with expiry for October 27, 2023, which we recommended a few weeks ago, rocketed from $220 with an implied volatility of 29% on Friday to an intraday high of $2,400 as implied volatility reached 52%, and those calls found themselves suddenly ‘in-the-money’.

As the example shows, Bitcoin rallied +10% without an official statement by the SEC, based on an unconfirmed news source. In that case, the actual approval can have a more pronounced impact, and a +20-30% rally appears to be a reasonable assumption – which would imply $16-24 billion of Bitcoin ETF inflows.

One thing is for sure: no trader can remain short into the announcement of a Bitcoin ETF approval and manage his / her risk appropriately, and Monday’s wild price action has shown that buying call options is the correct way to trade this event.

The genie is out of the bottle. Bitcoin calls are a ‘must-have’ weapon in every crypto warrior’s armor arsenal.

Another critical data point is that – expectedly – Ethereum massively underperformed. ETH volume underwhelmed with a spike in volumes of just +67%.

On the other hand, BTC volumes skyrocketed with a +180% increase to $28 billion. This is just short of $1 billion on August 30, 2023, when a US federal appeals court ruled that the SEC must review its rejection of Grayscale Investments’ attempt to convert its Grayscale Bitcoin Trust (GBTC) into an ETF. A few days ago, on October 14, 2023, news was released that the SEC would not appeal the court’s decision. These developments increase the odds that the SEC will approve a US-listed spot Bitcoin ETF within the next three months.

It’s been four months since BlackRock filed for approval, and the probability is increasing that their application will be approved. This week’s price action revealed that there will be enormous buying power of $8-24 billion unleashed into Bitcoin once the ETF is approved. BlackRock is not waiting for anybody else to eat their (Bitcoin) lunch – neither should you.

Disclaimer

This article reflects the personal views of its author, not Deribit or its affiliates. Deribit has neither reviewed nor endorsed its content.

Deribit does not offer investment advice or endorsements. The information herein is informational and shouldn’t be seen as financial advice. Always do your own research and consult professionals before investing.

Financial investments carry risks, including capital loss. Neither Deribit nor the article’s author assumes liability for decisions based on this content.

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Summary: Traders should not only monitor the breakdown of the chart-technical levels in the market (1,550) that predicts downside pressure but also the implied fair value (sub-800) based on the ETH price vs. the actual revenue being generated for Ethereum in times when yields on staked ETH are compressed, and stakers could head for the exits. ETH put spreads might be the preferable trade into the abyss.

Analysis

Earlier in the week, we had warned (here) that ETH could break its important support line at 1,550, which could set off cascading liquidations. While speculative positioning is relatively light, we believe traders might judge that ETH is overvalued as the Ethereum ecosystem has generated hardly any revenue recently. The interest in engaging with DeFi applications or minting NFTs powered by Ethereum is shrinking.

Technically, 1,550 is of the utmost importance, followed by 1,430 (-7%), and if that level is broken, we could even imagine that ETH would retest the support level at 1,200 (-23%). Traders could buy the 1,400 / 1,200 put with December 29, 2023 expiry for $25 [(45-20)/1540 ~1.6%]. If ETH drops to 1,200 by December 2023, traders will make a multiple of their investment. This is not only technically likely but also fundamentally.

He is why

Since 2015, Ethereum has generated nearly $17bn in fees, with over >60% of those being converted into revenue. Ethereum usage exploded during the 2021 double bull markets of DeFi summer and the NFT minting craze, so the fees and revenues within the Ethereum ecosystem exploded. But times have changed.

At the peak of the NFT minting bull market in November 2021, Ethereum generated $1.8bn in monthly revenues, and ETH traded near 4,600. When we run a regression analysis comparing monthly revenue with ETH itself, we must admit that ETH appears overvalued by -53% as revenue deteriorates faster than the ETH price. Ethereum has only generated $60m in revenue during the last 30 days, compared to $1.8bn in November 2021 – or in other words, Ethereum’s revenue has declined by -96% from its peak while ETH is “only” down -66%. The regression analysis indicates that the current ETH price (white) should fall back to the white regression line.

Based on this regression analysis, ETH fair value is sub-800 and expectations for a decline towards 1,200 might be conservative. This is a trading market and positive catalysts currently appear limited to Bitcoin (Blackrock ETF, store of value, alternative to monetary debasement or fiscal spending, etc.).

US Treasury bond yields (5.25%) are significantly above ETH staking yields (3.6% for Lido Finance’s ETH staking rewards). This could cause a slow outflow of crypto as declining ETH prices add to the misery of yield-hungry crypto investors. Those stakers ‘principal capital’ is slowly melting when prices fall.

During the last 90 days, the amount of staked ETH has increased from 21.5m to 27.5m – nearly 23% of all ETH outstanding. This increased staked ETH resulted in the estimated yield decreasing from 4.6% to 3.6%. But what is more important is that the “queue wait time” for validators to stake their ETH was 46 days in June 2023 and has now decreased to zero days waiting time.

This means that everybody who wanted to stake ETH is now staking, and there is no trade-off in un-staking your ETH as you can always go back in. The market can change from a “long-only” to a “two-way” flow. If we suddenly see an increase in “exit” requests, we can assume that those ETH might be converted to fiat or BTC. The could add to the selling pressure.

Traders should not only monitor the breakdown of the chart-technical levels in the market (1,550) that predicts downside pressure but also the implied fair value (sub-800) based on the ETH price vs. the actual revenue being generated for Ethereum in times when yields on staked ETH are compressed, and stakers could head for the exits. ETH put spreads might be the preferable trade into the abyss.

Disclaimer

This article reflects the personal views of its author, not Deribit or its affiliates. Deribit has neither reviewed nor endorsed its content.

Deribit does not offer investment advice or endorsements. The information herein is informational and shouldn’t be seen as financial advice. Always do your own research and consult professionals before investing.

Financial investments carry risks, including capital loss. Neither Deribit nor the article’s author assumes liability for decisions based on this content.

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Summary: We remain bullish on BTC, but acknowledge the weakness around the Ethereum ecosystem – technically, ETH prices could drop to 1,200 – if the 1,550 level breaks. ETH puts are cheap, especially relative to BTC puts. Stubbornly high US CPI, an increase in oil prices, and another military conflict are dampening sentiment but should have less of an impact on crypto prices. This is the time when trade construction will be critical.

Analysis

US inflation has printed higher for two consecutive months, and the market is anxiously awaiting the next inflation print this Wednesday. Expectations are for a month-on-month flat reading. Interestingly, crypto prices were slightly negatively impacted on the days when US CPI data was released, but it would be sensationalist to claim that the last few CPI prints mattered. Understandably, nobody appears to be concerned about this week’s inflation print.

Instead, geopolitical risk is picking up, and this could have a negative impact on sentiment. With the Russia / Ukraine war still lingering on, suddenly, a new war ignited in the Middle East. While markets have shown only a muted reaction, a more pronounced effect might still occur in the next few days when we see which nations might be drawn into this conflict.

The common denominator of both wars is energy prices. Energy prices are a leading indicator for inflation but have a relatively weak statistical relevance in the day-to-day trading landscape for crypto traders.

When the Russia / Ukraine war started on February 24, 2022, BTC was up +15% one week later, ETH also rallied by +14% while Crude Oil prices were up +19%. Therefore, geopolitical risk might not be substantially negative for crypto unless we see a significant escalation.

But what matters is that ETH is trading close to its multi-month support level at 1,550. This 1,550 support level might be the last line of defense before a steeping sell-off occurs. Technical support levels below this level are 1,440 and 1,200. Any ETH weakness could set off cascading liquidations and lower prices to the bigger support level at 1,200. This would catch many traders off guard, as the low implied volatility levels indicate. Traders only expect ETH prices to move by +/-3.8% until the end of the month based on option prices. During the last week, ETH prices declined by -5% while BTC prices remained flat. If the 1,550 level breaks, ETH puts could become very valuable.

We have noticed a pick-up in realized volatility for Ethereum relative to Bitcoin. Implied levels still indicate that at-the-money volatility for Ethereum is cheaper – or similar – to Bitcoin. Historically, Ethereum’s realized volatility has averaged 40% higher than Bitcoin’s. For the October 27, 2023 expiry, the at-the-money calls and puts for BTC trade at 32.8% implied vol, while similar ETH calls and puts trade roughly at 31% implied vol. ETH vol is cheap.

Selling an at-the-money BTC put for month-end expiry to finance an ETH put makes statistical sense if markets enter a higher beta environment. Arguably, with the potential for a broader military conflict, this trade appears attractive from various risk/reward standpoints.

ETH rallied last week on expectations of the Futures-based Ethereum ETFs in the US, but disappointing trading volumes during their first week of trading show that Ethereum does not have much going for itself right now. ETH issuance is higher than the burn, implying that ETH has become inflationary again. Revenues for the Ethereum blockchain continue to be minuscule. At least Bitcoin has the ‘Blackrock’ spot Bitcoin ETF application going for itself, and relative performance speaks volumes as the BTC / ETH ratio continues to climb higher.

When geopolitical risk becomes challenging to quantify, traders are well advised to trade ‘relative value’ – matching longs against shorts, instead of running with outright exposure. While ETH has not yet broken its 1,550 technical level – and might not do so – traders could finance the ETH put by selling a put on BTC for near zero cost currently, while historically, ETH realized vol was, on average, 40% higher than BTC vol.

To clarify, we remain bullish on BTC but acknowledge the weakness around the Ethereum ecosystem – technically, ETH prices could drop to 1,200 – if the 1,550 level breaks. ETH puts are cheap, especially relative to BTC puts. Stubbornly high US CPI, an increase in oil prices, and another military conflict are dampening sentiment but should have less impact on crypto prices. This is the time when trade construction will be critical.

Disclaimer

This article reflects the personal views of its author, not Deribit or its affiliates. Deribit has neither reviewed nor endorsed its content.

Deribit does not offer investment advice or endorsements. The information herein is informational and shouldn’t be seen as financial advice. Always do your own research and consult professionals before investing.

Financial investments carry risks, including capital loss. Neither Deribit nor the article’s author assumes liability for decisions based on this content.

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Summary: Bitcoin was the beneficiary during the March 2023 banking crash, and with at-the-money call options trading at only 30% implied volatility for the October 27, 2023 expiry, traders could buy those options as a ‘hedge’ if a 1987-style crash gets triggered due to higher bond yields.

The ADP nonfarm employment report showed the weakest job growth since the COVID-19 crisis. Instead of the forecasted 153k new jobs, only 89k were added. On Friday, October 6, the government survey-led Nonfarm payrolls report will be released.

While a weaker nonfarm payrolls report could set expectations that the Federal Reserve has finished its rate hiking cycle, market participants could also speculate that the lagged impacts of the previous rate hikes would severely impact economic growth. This could re-awaken the animal spirits that expected a recession to occur earlier in the year, but this appeared less likely without the labor market breaking. Things might have changed, and this labor market report could set the tone for the rest of the month.

Since May 2023, 10-year treasury yields have increased from 3.30% to 4.72% – an increase of 1.42%. Traders should remember that when Silvergate Bank, Signature Bank, and Silicon Valley Bank failed due to large bond losses in their portfolios, the 10-year treasury yield stood at less than 4.00% and is currently materially higher.

The FDIC had warned that US banks had $600bn of unrecognized losses on their ‘underwater’ securities on their books. But the situation could be worse now as bond yields have climbed higher. The US High-Yield Corporate Bond ETF (HYG) trades below the level reached in March 2023 when those three US banks went under. The US regional banks index is re-testing those March 2023 lows. The situation looks, at best, fragile.

The US financial markets crashed on Monday, October 19, 1987. The reasons were an overvalued stock market, persistent US trade and budget deficit, and rising interest rates. This all sounds familiar. But most crucial is that 10-year bond yields had been rising all year in 1987, with an acceleration from 8.3% in July 1987 to 10.2% in October 1987. This resembles today’s situation, with bond yields accelerating since May 2023 as the US fiscal situation starts to look dire.

While every market situation is different, the cycles still rhyme, and the risk that higher bond yields are breaking something undoubtedly increases. While we cannot see how Bitcoin would have performed during the 1987 crash, we can see that Bitcoin had a +20% rally in March 2023 when those three banks failed. In March 2023, the idea of a blanked FDIC deposit insurance was floated, and this governmental liquidity support caused Bitcoin to rally overnight.

Therefore, Bitcoin might be the critical beneficiary if some part of the economy breaks due to an explosive rise in bond yields. We are already seeing the stress on banks’ balance sheets, commercial real estate, etc., and we could start to see the stress in the labor market if nonfarm payrolls begin to disappoint.

Bitcoin was the beneficiary during the March 2023 banking crash, and with at-the-money call options trading at only 30% implied volatility for the October 27, 2023 expiry, traders could buy those options as a ‘hedge’ if a 1987-style crash gets triggered due to higher bond yields.

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Synopsis: The Fed has been on hold since July 2023. When the Fed paused the hiking cycle in 2019, Bitcoin prices rallied +400%.

As expected last week, Bitcoin prices have broken out of their short-term downtrend and could potentially target the 31,500 year-to-date highs. Higher oil prices and the relentless rise in US 10-year treasury yields could threaten financial markets as US central bankers might verbally pressure markets to expect hawkishness from the Fed.

But with inflation (3.67%) trading already materially below the Fed Funds rate (5.25%-5.50%), we would expect that the Fed would remain on hold for the next 1-2 quarters and assess the impact of their rate hikes on the economy.

Buying short-term call spreads (29,000 / 32,000) might be the optimal strategy for the next month-end expiry on October 27, 2023. The 29,000 calls are priced with an implied volatility of 33.4%, while the 32,000 calls are priced at 39.4% vol.

During the last FOMC meeting, central bankers were hawkish and managed that markets would remove their “priced-in” rate hike expectations for 2024. With 2-year yields (5.1%) still below the Fed Funds rate, we have to expect that the Fed has finished this hiking cycle and will remain on hold for an extended period.

If history is any guide, this could provide Bitcoin and Ethereum the opportunity to restart the bull market. After several rate hikes in 2018, the Fed paused for seven months in January 2019. During that time, Bitcoin prices rallied from 3,000 to nearly 13,000 by July 2019 – a rally of +400%.

Ethereum prices rallied from 85 to 336 during the same time – a nearly +400% rally. Once the Fed started to cut interest rates, citing “implications of global developments for the economic outlook as well as muted inflation pressures” and leaving the door open to future cuts, saying it would “act as appropriate to sustain the expansion,” Bitcoin prices corrected by nearly -40% over the next four months.

So, it was not the rate cut that caused the rally; instead, the Fed “pausing” their rate cycle was the trigger, and once the global economy showed weakness and the Fed cut rates, crypto prices corrected. If this cycle repeats, crypto markets might have entered a bullish period since the July 2023 FOMC meeting when the Fed paused, and Bitcoin traded at 29,200.

Traders should now look for “soft” stimulus from central banks regarding liquidity injections but fear that the Fed will cut due to global economic weakness. Germany’s year-on-year GDP growth has printed below zero (-0.2%, and economic contraction) for three consecutive months while the ECB has kept hiking interest rates even in their last meeting on September 20, 2023 – two months after the Fed had already paused their hiking cycle despite US GDP (+2.4%) being materially higher than that of Europe’s largest economy (Germany).

China’s central bank is ramping up liquidity injections to support the economy as the PBoC is constrained to lower interest rates as the Chinese Yuan trades at a new 17-year low. Historically, some of this liquidity found itself in overseas assets, and crypto traders should monitor any impact this might have on crypto prices.

Bitcoin markets might use the current calmness and try to rally, but traders should monitor the shifting macroeconomic landscape. Crypto might continue to climb higher if the Fed cuts due to lower inflation data. If the Fed cuts due to economic weakness, Bitcoin might enter an elevator-type correction. But first, use the Fed “pause” to position for the upside – still, we would recommend using options to manage your risk.

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After the Global Financial Crisis in 2009, Western Central Banks went on a quantitative easing (QE) path as the budget deficits skyrocketed. Central banks created money to stimulate the economy. An indirect effect of QE was lower interest rates on sovereign bonds. This kept interest rates low for more than a decade. Bitcoin was born into this monetary experiment.

The US debt-to-GDP ratio crossed above 100% for the first time since WW2 in 2012 and the Greek debt crisis in 2013 caused depositors to be bailed in when banks in Cyprus went under. Chinese capital was fleeing the country through over-invoicing of export receipts in the same year. Each of these ‘macro’ events had a profound impact on Bitcoin prices and in 2013, BTC-USD rallied by more than +5,000%.

When Satoshi Nakamoto mined the first Bitcoins, he made explicit references to the central bank bail-out programs in 2008. With fiscal and monetary policies having added a massive amount of debt since then, the case for an alternative store of value has become stronger than ever.

As foreign central banks (Saudi Arabia, Russia, China, etc.) are stepping away from accumulating US debt and therefore funding the US’s budget deficit, we are starting to wonder if the Fed will eventually have to step in and stop the explosive rise in 10-year bond yields and re-start their QE program again. While this sounds unorthodox, the QE of the 2010s was deflationary and allowed governments to fund their deficits.

The iShares 20 Plus Year Treasury Bond ETF has declined by -12.6% year-to-date. In fact, since 2020, this Bond ETF has declined by -50%, and even at these levels, the buyers’ strike continues. In March 2023, three US banks went under – mainly due to the duration mismatch of their bond portfolios.

Compare this to Bitcoin which has rallied by +62% year-to-date and while prices are also down -55% from the 2021 high, Bitcoin’s finite supply of 21 million coins has made it a better risk/reward trade-off during the last decade. But the past is the past and if there is ever a capitulation from central banks’ hawkish stance, Bitcoin prices could explode higher.

The Fed’s favorite inflation measure, the PCE price index, will be updated today and while the index has declined from 6.8% YoY in July 2022 to a 3.0% low in July 2023, the PCE index slightly moved higher in August and printed 3.3%. This 0.3% increase spooked the bond market and expectations are for another increase to 3.5% for today’s number. If the PCE surprises lower, below 3.0%, expect a strong rally for Bitcoin. In addition, expectations that the Fed would have finished its interest rate hiking cycle would also start to be re-priced into the market again – with Bitcoin being the main beneficiary.

During the last 24 hours, Bitcoin has broken the downtrend since the July 2023 high and there could be a snap-back rally towards $29,000 if US inflation data does indeed come in lower. Combined with the strong seasonals of October when the average return for Bitcoin has been +22% during the last 10 years, we can imagine a few wild days ahead.

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Smart traders will use the calmness of the Bitcoin options markets to position themselves for a potentially volatile October and an explosive end of the year. While the market is focused on the $2bn of calls and $1.2bn of puts (in notional US$) end-of-the-quarter expiry this week, several cataclysmic events could impact the direction of Bitcoin prices.

Bitcoin’s implied volatility percentile (IV Percentile), an indicator that shows the percentage of time when implied volatility has been lower than the current level, shows that volatility was only lower in 11% of the observations. As volatility is crucial in evaluating option values, a lower level shows that option prices are cheap, relative to history. The IV Percentile for Ether is even lower at 6%, which usually trades 30-40% above Bitcoin’s.

Either market makers do not appear to expect significant price moves, or traders have been lured into the range-trading market structure and are willing to sell short-dated options to collect some extra premium. Either way, this could be a misjudgment and an opportunity that smart traders could take advantage of.

The probability that Bitcoin will break out or break down from its $26,000/$27,000 trading range is relatively high during the next few weeks. The potential catalysts for a breakout are a US-listed Bitcoin ETF approval that the US Securities and Exchange Commission (SEC) has to approve or postpone until January, and the SEC will also have to address the Grayscale Investments request to convert the Grayscale Bitcoin Trust into an ETF in October as was ordered by a court ruling.

During the last ten years, the average return for Bitcoin in October has been +22%, with only 2014 (-13%) and 2018 (-4%) registering negative returns. This shows that Bitcoin has an 80% hit ratio (8 out of 10) to generate positive returns in October. Bitcoin returned +6%, +40%, +28%, and +10% during the last four years in October.

These potential catalysts could cause a material re-pricing higher for Bitcoin, considering the low implied volatility (36%) of a $28,000 Bitcoin call expiring on October 27, 2023, valued at $535 or 2.0% of the notional amount. The two percent cost for a call option vs. twenty-two percent average returns in October appears exciting.

On the flip side, the strength of the US dollar and rising US bond yields are damaging US corporate margins and the ability to attract capital at competitive rates. This could cause an economic recession, as predicted by the inversion of the 2-10-year Treasury Yield curve. As a result, US stocks have gradually declined from their July highs, and this year’s highflyers (Nvidia, Apple, etc.) are no longer carrying the equity market to new highs. There could be a spill-over effect into crypto, with prices breaking the $25,000/$26,000 support level.

A $24,000 strike put option expiring on October 27, 2023, costs $340 or 1.3% of the notional amount with an implied volatility of 40%. Pairing puts, and calls (buying a strangle – as the strike prices are different) would, therefore, cost 3.3% (2.0% for calls and 1.3% for puts), and as long as Bitcoin trades outside of these ranges (plus the option costs), then an investor could make money.

These odds seem in traders’ favor, considering the upside and downside catalysts that Bitcoin faces in October.

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