Positioning Ahead Of The January Bitcoin ETF SEC Decisions

https://insights.deribit.com/industry/positioning-ahead-of-the-january-bitcoin-etf-sec-decisions/

Summary: It would seem unlikely that the SEC would reject the Bitcoin Spot ETF applicants on January 10, 2024, after several discussions with those applicants and adjusting their S-1 filings. By Q1 2024, we expect Bitcoin to attempt to break above the 50,000 level. The expectations for a potential Bitcoin Spot ETF approval will likely hit the market between January 8 and January 10, 2024, making the January 12 options expiry attractive from a tactical perspective. Traders appear to price in that Bitcoin prices could swing by +/- 11% until then. Below, we discuss potential trades into the SEC Bitcoin Spot approval period.

Analysis

It would seem unlikely that the SEC would reject the Bitcoin Spot ETF applicants on January 10, 2024, after several discussions with those applicants and adjusting their S-1 filings. There has been considerable time and money spent on these applications and the re-filings, with the applicants rewriting their filings according to the demands set out by the SEC. Recently, we also heard that the applicants have moved closer to the terms set out by the SEC instead of the other way around.

While the SEC had waited until the last day in previous years to provide feedback to applicants, this time, the agency appears to have made an effort to provide feedback well ahead of time to align applicants.

Our view on December 8 of an expected 40,000 to 45,000 range-bound consolidation continues to play out. A key reason is that fiat-to-crypto inflows have paused after $7 billion was pumped through Tether’s minting process during the last eight weeks.

Surprisingly, Bitcoin’s funding rate remains elevated, indicating that leveraged traders have no interest in surrendering their upside positions and instead pay the punitive funding rate. By Q1 2024, we expect Bitcoin to attempt to break above the 50,000 level. The value of our short December 45,000 calls has dropped by -50% while our long January call declined by -20%. A small win.

The expectations for a potential Bitcoin Spot ETF approval will likely hit the market between January 8 and January 10, 2024, making the January 12 options expiry attractive from a tactical perspective. Traders appear to price in that Bitcoin prices could swing by +/- 11% until then. This would appear relatively narrow for such an important event.

We are keeping in mind that Bitcoin rose from 25,000 when BlackRock filed for an ETF on June 16 and prices hovering around 43,000/44,000. As we do not expect any SEC decision before January 8, traders could sell the January 5 expiry straddle with a strike of 43,000 and buy the straddle with expiry on January 12.

However, our preferred strategy would be to close out the calendar spread after Christmas (but before the new year starts), sell a 45,000 strike call for the January 5 expiry for $1,080, and buy a 45,000 strike call for the January 12 expiry for $1,720.

Bitcoin appears to be technically capped at 43,000 despite another positive refiling from BlackRock’s Bitcoin ETF application. This is a clear sign that applicants are almost coached by the SEC, and we struggle to entertain the view that the SEC would go to great lengths only to reject them again.

The Bitcoin technical indicators scream ‘sell-off around the corner’ as reversal indicators signal that the rally has run out of steam. Still, considering that we are so close to the holiday period, where trading volumes tend to be lower, and as we enter the event risk of January, technical signals should be set aside.

Exhibit: Ethereum/Bitcoin 30-day realized volatility spread at its lows

A key question arises if Bitcoin Spot ETFs are approved: will the SEC also approve Ethereum ETFs? This might be the case with a potential approval date of May 23, 2024. A Bitcoin ETF approval might disproportionally benefit Ethereum as the market is forward-looking. While Ethereum’s volatility tended to be higher, traders could currently buy Ether vol for the same price as Bitcoin vol.

While there is no urgency to focus on Ethereum, traders should monitor if the Ethereum/Bitcoin ratio can break out of the triangle as, historically, higher beta assets – such as Ethereum – have tended to outperform Bitcoin as the bull markets progressed.

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.

AUTHOR(S)

Markus Thielen

Author of the book “Crypto Titans: How trillions were made and billions lost in the cryptocurrency markets”. More info about Markus can be found here.


RECENT ARTICLES

The post Positioning Ahead Of The January Bitcoin ETF SEC Decisions appeared first on Deribit Insights.

Bitcoin’s Bold Stand: Prediction, Tether Twist, and ETF Drama

https://insights.deribit.com/industry/bitcoins-bold-stand-prediction-tether-twist-and-etf-drama/

Summary: The underlying data from our market timing models still support the view that Bitcoin might be range-bound until year-end. Despite our anticipation that Fed Chair Powell would start to sound dovish at this week’s FOMC meeting, Bitcoin failed to rally. A key reason for our bullishness was that we identified constant minting of Tethers. These inflows have stopped, and that’s why Bitcoin has stopped going higher. We are still leaning towards another Bitcoin Spot ETF delay until March. The premium for the CME Bitcoin futures and perpetual futures premium is working off their excessive levels, as holding long positions without a rally is expensive.

Analysis

Last week, we noticed the divergence between Bitcoin’s relative strength indicator and its price, which showed waning momentum. Similar to a year ago when Bitcoin attempted to rally in early December and failed, we expected that prices would be capped at 45,000 and Bitcoin would be trading in a 40,000 to 45,000 range until year-end. The underlying data from our market timing models still support this view that Bitcoin might be range-bound until year-end.

Despite our anticipation that Fed Chair Powell would start to sound dovish at this week’s FOMC meeting, Bitcoin failed to rally. This indicates that Bitcoin has become tired, and the odds for another rally before January are slim – as we pointed out earlier this week.

A key reason for our bullishness was that we identified constant minting of Tethers. This was a clear indication that institutional players were moving money from fiat into crypto – the result was a Bitcoin rally that surprised almost everybody during the last two months. But minting has slowed from a $1.6bn weekly peak to just $0.4bn. These inflows have stopped, and that’s why Bitcoin has stopped going higher.

Bitcoin’s dominance has also peaked with an increased likelihood that altcoins, notably Ethereum, could outperform Bitcoin. The dominance indicator peaked at 53.8% in early December and has declined to 51.9%; a reading below 50% would certainly signal that investors should trade altcoins to increase their profit potential.

Selling the December 45,000 call to finance the January 45,000 call partially is still an attractive way to position ahead of potential Bitcoin Spot ETF approval. While we still lean towards another delay until March, there is always the possibility of an ETF being approved, as several applications appear to have amended their stance. For example, the debate around cash or in-kind settlement appears to have progressed, but we still believe that there is no market-sharing data agreement in place, which might be instrumental for the SEC to approve an ETF.

Also pointed out previously, realized volatility in Bitcoin (48.8%) trades significantly above SP500 implied volatility (12.2%). With the Christmas holidays approaching and the Fed turning dovish into next year, Bitcoin volatility will likely be lower. Traders should consider selling Bitcoin volatility in all forms over the holidays.

The premium for the CME Bitcoin futures and perpetual futures premium is working off their excessive levels, as holding long positions in the absence of a rally is expensive. Similarly, unwinding call options will dampen any upside risk as traders would rather close those call positions, and the prospect of a Bitcoin Spot ETF approval is slim for the remainder of the year.

This is the time to be patient, and ideally, we prefer to let our short (December expiry) call expire worthless and keep pressing for more upside into January.

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.

AUTHOR(S)

Markus Thielen

Author of the book “Crypto Titans: How trillions were made and billions lost in the cryptocurrency markets”. More info about Markus can be found here.


RECENT ARTICLES

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After the correction, buy the dip or wait for January 1st?

https://insights.deribit.com/industry/after-the-correction-buy-the-dip-or-wait-for-january-1st/

Summary: We warned last week that Bitcoin would likely consolidate for the rest of the year within the 40,000 to 45,000 range. Bitcoin tends to decline into Christmas, such as last year, and the decline was even more likely with more institutional players involved. While no news nor associated economic data release caused the Bitcoin to sell off on Monday, the unwinding appears to have primarily occurred within the spot market AND subsequently within the TradeFi futures markets – NOT within the crypto native perpetual futures market.

Analysis

After weeks of being excessively bullish (here, here, here), we warned last week (here) that Bitcoin would likely consolidate for the rest of the year within the 40,000 to 45,000 range. Our market structure analysis indicated that leveraged long positions were stretched, and the panic buying ahead of the critical macroeconomic events, such as the CPI data release and the FOMC meeting, combined with the upcoming Christmas holidays, could cause traders to close positions.

We also noted that Bitcoin tends to decline into Christmas – such as last year, and with more institutional players involved, the decline was even more likely. The positioning on the CME Bitcoin futures indicated a very bullish position that is unlikely to be carried over the Christmas holidays as the futures traded at a significant premium to the spot market. Another negative factor was the technical divergence between a rising Bitcoin price and a lack of follow-through from technical indicators, signaling that a correction could occur as momentum waned.

Exhibit 1: CME Bitcoin futures premium over spot (5-day average)

Our suggested trade was to sell the December Bitcoin calls with a strike level of 45,000 and buy the same one for the January expiry. While the time value made the January calls more expensive, we are only concerned with the January period and thought it was prudent to hedge out the December period. For that, we were able to lower our call premium significantly.

In an ideal case, Bitcoin would stay below the strike level on the expiry date of December 29 and expire worthless, leaving us with a cheapened upside call for any potential SEC Bitcoin Spot ETF approval in January.

The price for the December 29 expiry, 45,000 strike Bitcoin call option has declined from $1,350 to just $750, while the January one has declined from $2,950 to $2,100. With implied volatility expected to decrease over the holidays and 45,000 potentially being out of reach for the next three weeks, patience is the name of the game. Instead of buying back the December call after Monday’s seven percent correction, we suggest being patient.

Exhibit 2: Bitcoin found support near 40,000

While no news nor associated economic data release caused the Bitcoin to sell off on Monday, the unwinding appears to have primarily occurred within the spot market AND subsequently within the TradeFi futures markets – NOT within the crypto native perpetual futures market. This fits our explanation that TradeFi traders set tight stop loss levels (43,000) to lock in profits, and those were easily triggered.

While 7% is hardly a correction to write home to your friends, this volatility shortly before the holidays will prevent TradeFi traders from loading up on their risk limits again this year despite a potential bullish outcome from this week’s US inflation report and from Fed Chair Powell’s FOMC press conference where his hawkish stance will continue to be challenged. As we pointed out, Powell had turned mildly dovish in October, which helped facilitate the rally in November and early December.

Nevertheless, we expect this week’s favorable macro outcomes will strongly incentivize Bitcoin to start rising out of the gate on January 1, 2024. Undoubtedly, this year’s +165% Bitcoin rally will facilitate many cheerful conversations around the Christmas tree.

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.

AUTHOR(S)

Markus Thielen

Author of the book “Crypto Titans: How trillions were made and billions lost in the cryptocurrency markets”. More info about Markus can be found here.


RECENT ARTICLES

The post After the correction, buy the dip or wait for January 1st? appeared first on Deribit Insights.

Bitcoin Consolidation Ahead – Calendar Spreads Look Attractive

https://insights.deribit.com/industry/bitcoin-consolidation-ahead-calendar-spreads-look-attractive/

Summary: Bitcoin will likely consolidate within the 40,000 to 45,000 range for the rest of the year. Although we have heard numerous S-1 filing updates, there have yet to be any public comments from the SEC that an approval is likely. Next week, the CPI print on December 12 and the FOMC meeting on December 13 will be pivotal. We would need non-farm payrolls to break below 100,000 to have a meaningful positive effect on the price of Bitcoin. Selling a 45,000 strike call for the end of December expiry and buying a 45,000 strike call for the January expiry (calendar spread) would be a prudent way to keep upside exposure alive for any potential SEC Bitcoin Spot ETF approval (after December).

Analysis

Bitcoin will likely consolidate within the 40,000 to 45,000 range for the rest of the year without credible news that the SEC will approve one or several Bitcoin Spot ETFs in January. There appears to be no urgency for SEC officials to approve an ETF ahead of the low liquidity Christmas period. Although we have heard numerous S-1 filing updates, there have yet to be any public comments from the SEC that an approval is likely.

Exhibit 1: Bitcoin (green) vs. RSI (white) – small divergence as technical are weaker than in Oct

Earlier in December, the SEC published that the final deadline for rebuttal comments by Bitcoin Spot ETF applicants would be January 5, 2024, followed by a potential SEC response between January 5 and January 10. We would expect a range-bound Bitcoin price action until then.

Next week, the CPI print on December 12 and the FOMC meeting on December 13 will be pivotal. Still, we assume traders will prematurely head into their Christmas holidays as the year has been successful for tech and crypto investors. While we expect inflation to decline during the next two quarters, we would need to see a fall below 3.0% (last 3.2% YoY) to reawaken the animal spirits and for Bitcoin to rally. Similarly, Fed Chair Powell will likely try to stay neutral instead of repeating his remarks in mid-October that bond yields have done the Fed’s job. Our base case scenario is that volatility will likely decline.

Even for tonight’s employment data, the options market is pricing in a Bitcoin move of only +/-2% over the subsequent 24 hours, a relatively low volatility event. However, while we saw a strong positive reaction on the back of weaker job openings, we would need non-farm payrolls to break below 100,000 to have a meaningful positive effect on the price of Bitcoin.

Of course, a low liquidity environment, such as weekends and Christmas holidays, can always cause adverse effects, and we would, therefore, structure trades where the downside is limited.

Previously, we pointed out that the gamma from the open interest 40,000 strike calls would likely pull markets higher, and once the level was broken, we saw aggressive hedging and a ramp-up in liquidations. Anecdotal evidence suggests that miners had sold 40,000 strike calls, which needed to be hedged once Bitcoin reached that level. But as those positions are now neutralized (delta-hedged), we suspect markets could consolidate.

If this is the most likely scenario, then selling a 45,000 strike call for the end of December expiry and buying a 45,000 strike call for the January expiry (calendar spread) would be a prudent way to keep upside exposure alive for any potential SEC Bitcoin Spot ETF approval (after December) but would of course neutralize our upside if any rally would occur from now until the end of the year.

Financing the January call by selling the December call lowers our call price from $2,950 (for the January 26, 2024 call with a strike level of 45,000) to $1,600 as the December call with the same strike trades at $1,350 (Buy January for $2,950 and Sell December for $1,350).

Exhibit 2: Bitcoin (green) – every period is different but Bitcoin consolidated after Dec 12, 2022

We predicted the rally’s start in January as our macro models suggested that inflation had peaked. But it took until mid-October for Fed Chair Powell to acknowledge that inflation had sufficiently declined and that the rise in bond yields had done the Fed’s job of tightening the cost of capital for the economy. Bitcoin took those comments from Fed Chair Powell as a risk-on signal, setting up the market for another potential rally next year. But as traders, we also need to manage our risk in periods of potential consolidation; we believe the next few weeks could prove challenging.

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.

AUTHOR(S)

Markus Thielen

Author of the book “Crypto Titans: How trillions were made and billions lost in the cryptocurrency markets”. More info about Markus can be found here.


RECENT ARTICLES

The post Bitcoin Consolidation Ahead – Calendar Spreads Look Attractive appeared first on Deribit Insights.

What happens if nobody sells his Bitcoins to BlackRock?

https://insights.deribit.com/industry/what-happens-if-nobody-sells-his-bitcoins-to-blackrock/

Summary: During Bitcoin halving years, we have seen rallies of +186% (2012), +126% (2016) and +297% (2020). At a Bitcoin price of 40,000 per coin, twenty-five thousand coins equate to $1 billion – or 250,000 Bitcoins equate to $10 billion. Compare this to the approximately 328,125 Bitcoins that were (will be) mined in 2023. A BlackRock Bitcoin ETF could scoop up 76% of all the supply from the mining community – not even considering that rewards will be cut in half from April 2024 onwards. Only 5.8 million of the 19.4 million mined Bitcoins have been moved during the last year, signaling that 70% of coins are just held for longer. 2.4 million Bitcoins appear to have been moved during the last six months, and this short-term holder supply could indeed be seen as the true free-float of the Bitcoin market.

Analysis

While everybody is aware that Bitcoin prices tend to go up during years when Bitcoin mining rewards are slashed in half (2012, 2016, and 2020), hardly anybody knows why this is happening. Based on our analysis, it is because the Bitcoin miners are restricting the flow onto exchanges and therefore suffocating supply – what’s left is a one-way demand from fiat investors – hence, we have seen rallies of +186% (2012), +126% (2016) and +297% (2020) during those years. Roughly, +196%, on average, when the four-year halving cycle occurred.

Based on this metric, the Bitcoin price will triple in 2024.

Exhibit 1: 2014 down, followed by three up, 2018 down, followed by three up, 2022 down…

BlackRock manages $10 trillion of client money, and since the company announced its Bitcoin Spot ETF application in June this year, we have been analyzing the potential inflows into Bitcoin. The most important consideration is that any bank linked to a U.S. brokerage account could suddenly be used to on- ramp into crypto – indirectly through an ETF, but nevertheless. This fiat-to-crypto onramp was severely impaired after the FTX implosion in November 2022 and the subsequent dismantling of three U.S. banks in March 2023. Hence, a Bitcoin Spot ETF is a significant development.

Our assumptions and estimates focused on a 20% reallocation from gold and silver ETFs, which have a market capitalization of $120 billion – therefore $24 billion of inflows – towards the higher end of $50 billion, which is derived from 1% of the assets some Registered Investment Advisors (RIA) manage as those investors predominantly use ETF for asset allocation decisions.

With an $800 billion market cap and $25 to $50 billion of new inflows appear doable, but on second thought, it seems rather challenging and could exaggerate the ‘short-squeeze’ we have been projecting during the last couple of months. First, we compared the time between the 2017 CME Bitcoin futures announcement and the actual listing of the futures, which resulted in a rally of +180% – everybody knew there was strong demand; the higher the prices, the more demand – FOMO.

At a Bitcoin price of 40,000 per coin, twenty-five thousand coins equate to $1 billion – or 250,000 Bitcoins equate to $10 billion. Compare this to the approximately 328,125 Bitcoins that were (will be) mined in 2023. As the miners are the most reliable group that would eventually have to sell due to corporate and shareholder responsibilities, a BlackRock Bitcoin ETF could scoop up 76% of all the supply from the mining community – not even considering that rewards will be cut in half from April 2024 onwards. This is based on an extremely conservative estimate of only $10 billion flowing into the Bitcoin Spot ETFs. Imagine $20 billion or $30 billion – there will be a massive squeeze.

Luckily, as a regulated entity, BlackRock (and other ETF providers) will be forced to deal with regulated entities. While 1.8 million Bitcoins ($72 billion) are on exchanges, most are held on unregulated exchanges. Of course, a massive transfer from unregulated to regulated exchanges will occur. Still, as the balance on exchanges has declined by -10% during the last year, many excess coins might not be available for ETF issuers – unless prices might materially move higher.

Only 5.8 million of the 19.4 million mined Bitcoins have been moved during the last year, signaling that 70% of coins are just held for longer. 2.4 million Bitcoins appear to have been moved during the last six months, and this short-term holder supply could indeed be seen as the true free-float of the Bitcoin market. There is no doubt that with the entrance of another massive accumulator of Bitcoins, prices will continue to rise. Other market participants are waking up to this fact, and that’s why we are seeing this squeeze.

Exhibit 2: Only 328,125 will be added in 2023, $10 billion ETF inflow equates to 250,000 coins

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.

AUTHOR(S)

Markus Thielen

Author of the book “Crypto Titans: How trillions were made and billions lost in the cryptocurrency markets”. More info about Markus can be found here.


RECENT ARTICLES

The post What happens if nobody sells his Bitcoins to BlackRock? appeared first on Deribit Insights.

Final Frenzy Before SEC Decision on Bitcoin ETF?

https://insights.deribit.com/industry/final-frenzy-before-sec-decision-on-bitcoin-etf/

Summary: Traders must remember that the rally from 25,000 to 38,000 is primarily built upon the assumption that the SEC will approve a Bitcoin Spot ETF. The SEC is still in an open lawsuit with Coinbase, which is expected to be the primary counterparty (prime broker and custodian) for various Bitcoin Spot ETF applicants, and the SEC sued Coinbase in June. Each of the four crypto bull markets (2011, 2013, 2017, and 2021) was associated with a novel way to acquire Bitcoins. With the approval of a Bitcoin Spot ETF, moving fiat from any bank into Bitcoin would then become possible.

Analysis

Another month, another rally attempt? 38,000 appears to be a tough nut to crack, but we would still expect another break higher attempt. Traders must remember that the rally from 25,000 to 38,000 is primarily built upon the assumption that the SEC will approve a Bitcoin Spot ETF – eventually – or even immediately. We would use any break higher to position ourselves for a sideways to mildly downside surprise afterward.

I don’t expect a Bitcoin Spot ETF to be approved in Q1 2024, as there is no surveillance-sharing agreement yet. The SEC is still in an open lawsuit with Coinbase, which is expected to be the primary counterparty (prime broker and custodian) for various Bitcoin Spot ETF applicants, and the SEC sued Coinbase in June, accusing it of operating illegally as a national securities exchange, broker, and clearing agency without registering with the regulator. The SEC may approve a Bitcoin Spot ETF in April 2024 or later.

Each of the four crypto bull markets (2011, 2013, 2017, and 2021) was associated with a novel way to acquire Bitcoins. From 2011 onwards, we had spot exchanges, 2013 leveraged spot exchanges, 2017 perpetual futures exchanges, and 2021 saw the institutional borrowing and lending market effectively with uncollateralized borrowing from crypto hedge funds and trading desks – I wrote about it in my book ‘Crypto Titans’. In this fifth bull market and with the eventual approval of Bitcoin Spot ETFs, Bitcoin could become part of institutional portfolios and be used to collateralize assets. This could create leverage or other ways of portfolio optimization. Importantly, moving fiat from any bank into Bitcoin would then become possible.

Three US banks were dismantled in March 2023 that were instrumental in facilitating the seamless onramp from fiat into crypto, and there has yet to be a replacement. This is why the onramp we have been seeing this year has been predominantly institutional, as this avenue is still available through Tether, which does not deal with retail. A Bitcoin Spot ETF would solve this onramp with regulated, trusted entities, and investors still demand crypto allocation.

Futures-based Bitcoin ETFs lose money for investors due to the high operating costs and the near permanently high monthly roll costs, which are elevated in times of high interest rates and bullish market environments. On average, a Bitcoin Futures ETF holder will lose 6-8% annually and underperform Bitcoin Spot. It is remarkable that even those Bitcoin Futures ETFs have attracted $1.1bn in assets – imagine the amount a low fee with near zero tracking risk Bitcoin Spot ETF could attract. This compares to the expectations that a Bitcoin Spot ETF would cost 1% or less for investors per year, including custody fees.

The performance of listed Bitcoin-proxies, such as Bitcoin mining or other crypto service providers (Coinbase, Galaxy, MicroStrategy), shows that there is pent-up demand from investors. The market capitalization of precious metals ETFs in the US is $120bn, and 77% of respondents under 40 prefer Bitcoin over Gold as a safe haven asset. If 20% of those previous metals holdings were moved into a Bitcoin ETF, this would result in $24bn of inflows. In comparison, Registered Investment Advisors (RIA), which manage around $5trn (or more by other estimates), could move 1% into Bitcoin – for example, for portfolio diversification reasons, that would result in $50bn of inflows. Through our work with BlackLitterman Asset Allocation portfolio analysis, we can make the case that Bitcoin could become 0.5% to 10% of institutional portfolios.

While there are Bitcoin Spot ETFs in other countries, the US market is dominated by institutions (78% of trading volume) that actively use ETFs as the market is large enough to use sector strategies for asset allocations. This is not the case in other jurisdictions. As mentioned above, the RIA community is $5trn strong and prefers using ETFs for asset allocation strategies. This is why the Bitcoin Spot ETF can be a big deal in the US.

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.

AUTHOR(S)

Markus Thielen

Author of the book “Crypto Titans: How trillions were made and billions lost in the cryptocurrency markets”. More info about Markus can be found here.


RECENT ARTICLES

The post Final Frenzy Before SEC Decision on Bitcoin ETF? appeared first on Deribit Insights.

Is Bitcoin’s Volatility 30% Overpriced Compared to the S&P 500?

https://insights.deribit.com/industry/is-bitcoins-volatility-30-overpriced-compared-to-the-sp-500/

Summary: Volatility will likely decline into year-end as an ETF approval appears less likely ahead of the January deadlines. The realized Bitcoin volatility to VIX ratio currently stands at 3.4x while the average has been 2.4x in 2023 – hence, Bitcoin volatility is 30% too high relative to VIX volatility. This signals that Bitcoin volatility is likely to decline from here. Our base case scenario remains bullish, and buying upside exposure should be done in a relatively neutral vega way – hence buying call spreads – instead of purchasing outright calls – as we expect volatility to decline into year-end.

Analysis

Realized and implied volatility for Bitcoin has surprisingly remained high – despite the SP500 equity market volatility – as measured by the VIX index has declined to multi-year lows. Traders might be fearful of selling volatility ahead of any potential SEC Bitcoin spot ETF approval. Still, as we pointed out during the last two to three weeks, volatility will likely decline into year-end as an ETF approval appears less likely ahead of the January deadlines.

But as this ‘selling volatility’ trade through strangles has not yet worked, it does not mean it won’t work until year-end. On the contrary, the high Bitcoin volatility allows traders to enter this trade at attractive levels. At-the-money implied Bitcoin option volatility is priced at 46% for the end of December expiry, while the 30-day realized volatility trades marginally below this level at 43%. The realized Bitcoin volatility to VIX ratio currently stands at 3.4x while the average has been 2.4x in 2023 – hence, Bitcoin volatility is 30% too high relative to VIX volatility. Traders could hedge Bitcoin exposure with SP500 put options as the correlation coefficient has remained at 58% over 30 days. Traders could sell Bitcoin options as volatility appears overpriced based on the general perception of market risk.

Exhibit 1: Bitcoin 30d realized vol / VIX spread (green, LHS) vs. correlation (white, RHS)

While not every trader can trade across markets (Bitcoin vs. SP500 options), the volatility spread ratio between Bitcoin and SP500 is currently at the top of the two- year range. It signals that Bitcoin volatility is likely to decline from here. Historically, selling the vol spread at 3.5x was profitable, and buying Bitcoin vol relative to SP500 VIX vol when the ratio was near 1.0x – as in August and early October 2023 turned out to be a money maker.

Exhibit 2: Bitcoin 30d realized vol (green, LHS) vs. SP500 VIX vol (white, RHS)

A week ago, we expected Bitcoin to break above the 38,000 resistance level. Indeed, Bitcoin broke briefly above this level but failed to gather sufficient upside momentum and moved back into the 35,000 to 38,000 range. A move above 40,000 is still possible, but traders might have been less motivated to chase the upside because of the long Thanksgiving weekend.

However, when we enter December, we still expect Bitcoin to attempt another rally as prices tend to rally by +12% during the last month of the year. Previously, we have shown that Bitcoin prices tend to peak one week before Christmas, and the last FOMC meeting of the year is also on December 12/13, when we would expect the Fed to continue to remain on hold. The tail risk for this meeting would be acknowledging a potential downside from the labor market. The prospect of rate cuts could also cause a rally in Bitcoin prices. Another wild card is undoubtedly an annual inflation data point with a ‘two-handle’ as this would also raise speculation that the Fed could eventually signal rate cuts.

It also appears that the bull market continues to broaden with Bitcoin’s dominance indicator declining and network fees and altcoin blockchains increasing to the highest since summer. The key will be to monitor if those network fees are sustained.

Our base case scenario remains bullish, and buying upside exposure should be done in a relatively neutral vega way – hence buying call spreads – instead of purchasing outright calls – as we expect volatility to decline into year-end. As the Bitcoin volatility/VIX vol ratio has remained near the top of its two-year range, selling Bitcoin volatility can still be done at attractive levels.

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.

AUTHOR(S)

Markus Thielen

Author of the book “Crypto Titans: How trillions were made and billions lost in the cryptocurrency markets”. More info about Markus can be found here.


RECENT ARTICLES

The post Is Bitcoin’s Volatility 30% Overpriced Compared to the S&P 500? appeared first on Deribit Insights.

Bitcoin ETF Set to Revolutionize Crypto Options Market

https://insights.deribit.com/industry/bitcoin-etf-set-to-revolutionize-crypto-options-market/

Summary: Despite the strong rally in the Bitcoin spot market (+125% YtD), traders lacked interest in buying leveraged upside through Bitcoin options as volatility underperformed. The entrance of institutional players will dampen implied volatility. A trading strategy that loses money in two out of every nine trades (22%) is probably profitable – as selling strangles has proven to be this year. After the ETF approval, it could be the last chance to sell volatility on a structural basis, as institutions will structurally sell volatility from that point onwards.

Analysis

Introducing US-listed Bitcoin spot ETFs will fundamentally change the crypto options market. Despite Bitcoin returning +125% year-to-date, the average 30-day realized volatility has only achieved 41%, while the 5-year average stands at 63%. In other words, despite the strong rally in the spot market, traders lacked interest in buying leveraged upside through Bitcoin options as volatility underperformed. This observation will likely continue to play a significant role as institutional players aim to structurally arbitrage the (relatively) high implied volatility that Bitcoin options tended to be priced with.

Bitcoin options volume will likely continue to increase, but the entrance of institutional players will dampen implied volatility. The days of 50-100% implied volatility might be behind us. An institutional player holding a sizeable long position in Bitcoin would be incentivized to sell volatility and sophisticated enough to alter the market and keep volatility marked within a lower range. While there will be periods of extremely high volatility, those periods will only be temporary, and the Bitcoin derivatives market will resemble the TradeFi options market with the introduction of institutional players.

For every one Bitcoin put option outstanding, there are two calls outstanding, but this 1:2 (or 0.5) ratio for puts vs. calls is likely to fundamentally change after the introduction of the Bitcoin ETF. As a comparison, the put/call ratio for the SP500 has averaged between 1.2 to 1.5 this year – for every one call, there are 1.2 to 1.5 puts outstanding. This could be ‘the rise of the puts’ as more investors want to harvest volatility through a sell-put strategy.

Exhibit 1: +20% rallied in Bitcoin occurred on four occasions this year (30-day rolling return):

Selling strangles (120% call and 80% put) on a constant 30-day rolling basis would have seen those options being in the money in 23% of the observations during the last 1-year. During the end of the summer, this strategy would have been in the red in only 15% of the observations – compared to 50% to 55% during the DeFi summer period from June 2020 to October 2021. While this is an oversimplification, a trading strategy that loses money in two out of every nine trades (22%) is probably profitable – as selling strangles has proven to be this year.

Exhibit 2: Bitcoin (green) vs. frequency an 80% put and 120% call strangle selling strategy lost money:

While we were among the most prominent Bitcoin bulls this year, we also suggested that selling volatility is one of our favorite strategies. With the approval of US-listed spot Bitcoin ETFs, we expect implied volatility to decline materially in 2024. We suspect the weeks after the ETF approval could be the last chance to sell volatility on a structural basis, as institutions will structurally sell volatility from that point onwards.

In August 2023, 30-day realized volatility dropped to sub-20%. With the expectations of an ETF being approved in January 2024, realized volatility has increased to 43%, while at-the-money implied volatility has remained at 51%. Institutions will want to arbitrage this 8% (51%-43%) away on a constant, systematic basis, dampening Bitcoin’s volatility.

Previously, we showed how Bitcoin rallied into and after the CME Bitcoin futures announcement. When the SEC approves a Bitcoin spot ETF, prices will likely rally for several weeks afterward. However, volatility might underperform as the periods of parabolic price moves are behind us with the institutionalization of Bitcoin.

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.

AUTHOR(S)

Markus Thielen

Author of the book “Crypto Titans: How trillions were made and billions lost in the cryptocurrency markets”. More info about Markus can be found here.


RECENT ARTICLES

The post Bitcoin ETF Set to Revolutionize Crypto Options Market appeared first on Deribit Insights.

The Pressure is Mounting for Another Bitcoin Breakout

https://insights.deribit.com/industry/the-pressure-is-mounting-for-another-bitcoin-breakout/

Summary: We are changing our trading strategy from a range bound market to another potential breakout that sees Bitcoin trading above 40,000 in December with any rally likely capped at 45,000. A cost efficient strategy would be positioning for this move through call spreads as volatility has remained relatively high and the upside opportunity appears attractive. While people are debating on TV if and when a Bitcoin ETF is coming, $2.8 billion is being moved into crypto this month alone! Somebody is voting with their wallet.

Analysis

The pressure is building – another breakout looms. The Bitcoin price action resembles a volleyball held underwater; it can pop higher at any moment as this rally is still unfinished. Various ETF issuers regularly appear on TV, spreading the message that a Bitcoin ETF is inevitable. This will keep the momentum high.

For the last week, we suggested that strangles (selling out-of-the-money puts and out-of-the-money calls) were the right strategy if a small risk-off event would occur. This risk-off event could have been a US government shutdown that could have caused a repricing in the expectation that a US-listed Bitcoin ETF would be approved by the SEC. A government shutdown could have pushed any approval date into the distant future, resulting in a decline in Bitcoin prices. The upside into year-end would have been capped.

But the shutdown was averted, and the expectations for a January 2024 approval continue to build up. As the US stock market has also woken up to our Christmas Santa Claus rally, Bitcoin has additional support from other risk assets.

During the last eight years, Bitcoin has returned +12%, on average, during the month of December.

As the market structure also supports another push higher into December, we suggest switching from strangles (selling puts and calls) into buying call spreads, notably buying the call with Dec 29 expiry with a strike level of 40,000 and selling the 45,000 calls with the same expiry.

Previously, we pointed out that the increase in Tether’s USDT market capitalization signals a conversion of fiat into stablecoins, and it would ultimately be detected as new inflows into crypto. Tether’s market cap has increased by $2.8 billion in November alone. This shows that institutional players that are paramount in facilitating those flows (as Tether only deals in minimum $100,000 clips) are deploying billions into crypto ahead of any potential BlackRock Bitcoin ETF launch.

Think about it. While people are debating on TV if and when a Bitcoin ETF is coming, $2.8 billion is being moved into crypto this month alone! Somebody is voting with their wallet.

The crypto market capitalization is approaching $1.5 trillion again, and it was our theory that once crypto’s market capitalization had reached one trillion dollars, institutional players and TradeFi hedge funds suddenly had to get involved with this new asset class. There is also no coincidence with TradeFi billionaire hedge fund managers returning from hibernation during the last few weeks, making a solid investment case for Bitcoin in institutional investors’ portfolios.

While we have seen a material shift during the last three weeks when trading volume in Ethereum has increased relative to Bitcoin, Bitcoin dominance has moved up again, signaling that traders should continue to focus on Bitcoin – and not necessarily on Altcoins. While a cherry-picked altcoin like Solana has rallied strongly during the last few weeks, most altcoins are still far behind Bitcoin’s performance in 2023. Large investors will also have trouble navigating the lack of liquidity that most altcoins face, while Bitcoin trades 20 billion to 30 billion dollars daily.

Based on our analysis, a break above the 38,000 technical resistance level could cause a sharp rally to 40,000. And while Bitcoin currently struggles with the 37,000 level, this is not critical level for technical analysts. Instead the clearance of the 35,000 resistance has opened the door to 40,000 with another minor resistance at 42,500 and then a strong resistance awaits at 45,000. However, we see very little chance for the rally to go beyond 45,000 this year – next year is a different story, of course.

Therefore, we are changing our trading strategy from a range bound market to another potential breakout that sees Bitcoin trading above 40,000 in December with any rally likely capped at 45,000. A cost efficient strategy would be positioning for this move through call spreads as volatility has remained relatively high and the upside opportunity appears attractive.

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.

AUTHOR(S)

Markus Thielen

Author of the book “Crypto Titans: How trillions were made and billions lost in the cryptocurrency markets”. More info about Markus can be found here.


RECENT ARTICLES

The post The Pressure is Mounting for Another Bitcoin Breakout appeared first on Deribit Insights.

Unveiling the Four Driving Forces behind the Bitcoin Price Surge

https://insights.deribit.com/industry/unveiling-the-four-driving-forces-behind-the-bitcoin-price-surge/

Summary: Bitcoin is driven by four factors: SEC Bitcoin ETF decision, willingness to add to leverage by futures & options traders, fiat inflows into stablecoins, and the fee generated within the Bitcoin network. Selling strangles (selling calls and selling puts) could generate +7.1% into year-end as volatility is relatively high currently. Fiat inflows into stablecoins have averaged more than $100 million per day last month. The increase in fee generation for the Bitcoin network indicates that activity has increased, which is fundamentally important.

Analysis

Four factors drive the Bitcoin price at this point: 1) expectations that the SEC would approve a spot Bitcoin ETF, 2) increased demand for leveraged positions, 3) fiat inflows through stablecoins, and 4) improved fee generation through the Bitcoin network.

Let’s look at each point in detail:

The second deadline for most of the Bitcoin spot ETF applications passed in mid- October without any comments from the SEC. As Bitcoin has traded around the $35,000 level for nearly three weeks and the third deadline is mid-January 2024, we expect implied volatility to decline into year-end as any approval before Christmas appears less likely.

But, this does not mean that the price of Bitcoin will necessarily decline. Even as a decision by the SEC appears less likely this year, there is still plenty of demand from traders to take leveraged upside positions. So far, this has primarily manifested through the perpetual futures markets, where the funding premium was as high as +28% annualized on Monday, November 13, and has since declined to +11%. While still offering attractive arbitrage opportunities, the waning futures premium indicates that leveraged long positions are being unwound. This could become a short-term headwind for the price of Bitcoin.

Another sign of excessive speculation is the repricing of implied volatility for options. Arguably, 30-day realized volatility is trading near its 5-year average of 63%, but at 50%, we think realized volatility will likely decline into year-end. As we wrote on November 14, selling strangles (selling calls and selling puts) could generate +7.1% into year-end as volatility is relatively high currently. We struggle to see how markets could materially shoot above the 40,000 level without an SEC Bitcoin spot ETF approval.

As we pointed out last week, the market capitalization increase in Tether’s USDT signals that new fiat money is being moved into crypto. This inflow has reached $3.8 billion during the last 30 days—more than $100 million daily. After five months of almost zero inflows, those flows have materially picked up and, we would argue, had a pronounced impact of trickling down to the altcoins, where people became more comfortable taking riskier bets. While crypto equity-linked notes (ETNs) have also seen nine weeks of consecutive inflows of $1bn, the stablecoin inflows are more significant and show institutional demand.

The Bitcoin network currently generates $54 million in fees, and while we are only halfway through November, this month already turns out to be the second strongest. Ordinals have made a comeback as Binance rolled out support for ORDI, the original BRC-20 token. UniSat and Magic Eden dominate the Ordinals space regarding the number of users. Still, OKX appears to have gained a 73% market share recently – however, this number does not include the volume from Binance.

Nevertheless, the increase in fee generation for the Bitcoin network indicates that activity has increased and this is fundamentally important. Even if the SEC is pushing out any decision around a Bitcoin ETF into January and leveraged futures traders are unwinding some of their bullish perpetual while others also take off some of their leverage upside call positions, Bitcoin could still rally due to solid fiat inflows and a healthy, fee-generating Bitcoin network.

However, in the absence of the former two drivers (SEC ETF approval + decline in leveraged long positions), Bitcoin might not run away and trade materially above 40,000. We still view our trading idea that recommends selling puts and calls as viable in the current environment. Since our latest report, the December 29 expiry call with the 40,000 strike price has declined from $1,844 to $1,660 while the 32,000 put premium has remained around $800. This is understandable as we have not yet seen a material decline in implied volatility.

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.

AUTHOR(S)

Markus Thielen

Author of the book “Crypto Titans: How trillions were made and billions lost in the cryptocurrency markets”. More info about Markus can be found here.


RECENT ARTICLES

The post Unveiling the Four Driving Forces behind the Bitcoin Price Surge appeared first on Deribit Insights.

Crypto Faces the Storm: How Will a US Government Shutdown Impact?

https://insights.deribit.com/industry/crypto-faces-the-storm-how-will-a-us-government-shutdown-impact/

Summary: During the last 30 days, we have seen $+4.5 billion of fiat being deployed into crypto markets – liquidity lifting prices higher and igniting a rally in altcoins. A US government shutdown could occur on Friday, November 17, and might last a month. Then, work finalizing a Bitcoin ETF might be pushed out beyond January 2024 due to the Christmas holidays. The result could be a sharp decline in implied volatility as any near-term rally in Bitcoin prices would become unlikely in the case of a government shutdown. Selling Dec ’23 expiry calls and puts with 40,000 and 32,000 strike prices could generate a +7.1% return at year’s end.

Analysis

During the last month, Tether’s market capitalization increased by $+3.5 billion, while crypto-related investment products saw $+1 billion after seven consecutive weeks of net inflows. This shows that new liquidity is entering the crypto space, and it is tough to argue why Bitcoin would see a material sell-off at year’s end. Instead, Bitcoin might be trapped in a range if some macro risk events materialize. We will know shortly. With options, traders can also make attractive products in various trading markets.

U.S. House Speaker Mike Johnson proposed a compromise temporary funding plan without insisting on deep spending cuts (Stopgap). A government shutdown could last a month, and then work finalizing a Bitcoin ETF might even be pushed out beyond January 2024.

There is a non-zero risk that the U.S. government will shut down by Friday, November 17. In that case, all federal agencies must cease all non-essential functions until Congress acts. This would include the Securities and Exchange Commission (SEC), which could approve a Bitcoin ETF at any moment. During the last ten years, we had three government shutdowns, lasting from 3 days (January 2018) to 16 days (September 2013) to 34 days (December 2018) – or 17 days on average. This would make any potential Bitcoin ETF approval challenging before the Christmas holidays. Subsequently, any preliminary work before a possible Bitcoin ETF approval in January 2024 would also be challenging.

U.S. House Speaker Mike Johnson is proposing a compromise for a temporary funding plan without insisting on deep spending cuts (Stopgap). But a shutdown could have significant implications for us crypto traders.

Bitcoin’s funding premium is already shrinking, and this could be a leading signal that the upside is capped for now as directional players harvest the +17% annualized funding spread rather than have directional long exposure.

The result could be a sharp decline in implied volatility as any near-term rally in Bitcoin prices would become unlikely in the case of a government shutdown. This could keep Bitcoin prices in a tight range until January and cause implied volatility to fall significantly. Traders could sell the December 29, 2023, put with a strike price of 32,000 and the 40,000 strike call. The latter call trades with an implied volatility of 55% and could be sold for $1,844, while the 32,000 put trades with a 54% implied volatility and could be sold for $800. Therefore, $2,644 could be generated through this strangle or roughly 7.1% until year-end.

A potential government shutdown would also pause any macroeconomic data releases the US agencies collect. For example, the inflation data that the Fed uses for its interest rate projection could fail to be reported, and central bankers and traders would fly blind without reliable data. A year ago, we became big Bitcoin bulls as we expected a sharp decline in US CPI – which has indeed materialized.

In line with the recent rally in crude oil prices, US inflation rebounded slightly, but today’s CPI report could be the start of another decline in US inflation. This would continue to provide tailwinds for risk assets, and we would suggest accumulating upside exposure for 2024 if we see any dip in Bitcoin prices. Our inflation model implies that US CPI YoY would decline from 3.7% to 1.6% in 2024 – this will be bullish for risk assets (tech stocks and crypto) – hence we remain bullish into next year.

From a short-term trading perspective, we could see a decline in Bitcoin prices towards 35,800, but unless today’s inflation report sets off the fireworks – which we do not expect – Bitcoin might trade in a broad sideways range of 32,000 to 40,000 until the year-end.

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.

AUTHOR(S)

Markus Thielen

Author of the book “Crypto Titans: How trillions were made and billions lost in the cryptocurrency markets”. More info about Markus can be found here.


RECENT ARTICLES

The post Crypto Faces the Storm: How Will a US Government Shutdown Impact? appeared first on Deribit Insights.

BlackRock Ethereum ETF Filing Sparks Trader Panic – What’s next?

https://insights.deribit.com/industry/blackrock-ethereum-etf-filing-sparks-trader-panic-whats-next/

Summary: A big squeeze was imminent because of last week’s favorable macro events. A lower CPI print next week could reinforce the market’s view that interest rates have peaked. The combination of the Bitcoin ETF announcement, Santa Claus rally, better macro data, and the Fed pausing, combined with Bitcoin being overbought, provided the ingredients for a massive rally. Tether was busy minting USDT since mid-October – in total $3 billion fresh capital came into the market. This is a golden period for market-neutral crypto hedge funds as basis trades offered juicy returns. In this environment, allocators will be knocking on their door. But then BlackRock filed for an Ethereum ETF…

Analysis

Our Monday, November 6, 2023 report titled ‘ The Santa Claus Squeeze is coming’ turned out timely.

The Ethereum/Bitcoin ratio had hit support and appeared to start rebounding. Our thesis that a big squeeze was imminent was due to the favorable macro environment where we had three supportive events last week: 1) the U.S. Treasury issuing more short-term and less long-term debt which indicated expectations for lower bond yields, 2) Fed Chair Powell being dovish in the post-FOMC meeting press conference and 3) a weaker U.S. employment report which reinforces the first two points.

Next week, we will receive U.S. inflation data on November 14, which could start to decline again after four months of higher inflation. Oil prices have declined by – 20% during the last three weeks. A lower CPI print could reinforce the market’s view that the U.S. interest rates cycle has ended.

Previously, we suggested ‘Buy the Fed’s Pause but Sell the Fed’s first rate cut’ which is expected for June 2024. Historically, when the Fed paused after an extensive rate hiking cycle, Bitcoin saw a massive rally – as we wrote on October 3, 2023.

Despite Bitcoin being overbought – based on an RSI above 70% – since October 19, we warned that an overbought condition actually sees Bitcoin rallying further – as much as +24% over the next 20 days when the RSI climbed above 85%. On October 19, Bitcoin traded at 28,719; today, we are +27% higher. A quite remarkable performance.

But it was not unexpected, considering the 2017 squeeze when the Chicago Mercantile Exchange (CME) announced the planned listing of the Bitcoin futures. From the announcement until the launch, Bitcoin prices rallied +288% – as we wrote in our report ‘Echoes of 2017: CME Bitcoin Futures Launch Hints at +288% Returns!’.

This led us to believe we would be entering the FOMO – fear of missing out – stage. Our report ‘FOMO is back! Crypto Traders are panicking’; we looked forward to this scenario as the combination of the Bitcoin ETF announcement, Santa Claus rally, better macro data, and the Fed pausing, combined with Bitcoin being overbought, provided the ingredients for a massive rally. We also noticed that stablecoin issuer Tether has been busy minting USDT since mid-October – in total, $3 billion in fresh capital came into the market. This showed that someone is pre- positioning themselves for a big rally.

Exhibit 1: Tether USDT market cap reached $86bn, trading volume reached nearly $70bn

On Monday, November 6, our data mining indicated that weekly revenue data for Ethereum was improving while, at the same time, Bitcoin’s dominance was declining while trading volume in Ethereum relative to Bitcoin was on the rise. Our ETH/BTC greed and fear risk index signaled ETH outperformance and Ethereum’s funding rate started to skyrocket. This made us bullish on Ethereum – and alts.

On Wednesday, November 9, BlackRock registered an Ethereum Trust in Delaware, signaling their intention to launch a BlackRock Ethereum ETF. A few hours later, BlackRock filed a spot Ethereum ETF with Nasdaq. This could support Ethereum to the same extent as Bitcoin into year-end.

This announcement caused a panic. Deribit’s trading volume was $12 billion during the last 24 hours; crypto traded well over $100 billion, with Bitcoin $35 billion and Ethereum $44 billion being traded. Short-covering in Ethereum perp futures brought the funding rate above 54% annualized. This is a golden period for market-neutral crypto hedge funds. In this environment, allocators will be knocking on their door.

Exhibit 2: Ethereum’s annualized funding rate spiked to +54.6% on short covering

Some argue that the listing of the CME Bitcoin futures was at the top of the 2017 bull market – this is correct. But Bitcoin futures traded at massive premiums, which could be arbitraged away. An ETF listing will have zero-premium and real- money inflows for months to come. Therefore, even when the ETFs will start trading, the bull market could continue. This is no longer the time for market neutral crypto funds, this is the time of the beta funds.

With the potential approval of a BlackRock Bitcoin ETF and suddenly a BlackRock Ethereum ETF being filed, we can see that FOMO goes into overdrive. Crypto is truly in a new bull market, and people will only sell ahead of the actual launch of those ETFs.

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.

AUTHOR(S)

Markus Thielen

Author of the book “Crypto Titans: How trillions were made and billions lost in the cryptocurrency markets”. More info about Markus can be found here.


RECENT ARTICLES

The post BlackRock Ethereum ETF Filing Sparks Trader Panic – What’s next? appeared first on Deribit Insights.

The Santa Claus Squeeze is coming

https://insights.deribit.com/industry/the-santa-claus-squeeze-is-coming/

Summary: Three macro events of the last week set risk assets – stocks and crypto – up for a sizeable rally into year-end. This is also the first week when higher beta crypto assets outperformed Bitcoin and could signal that a massive rally is in the cards. We encourage our readers to re-read two insights we wrote in October to determine if they have the correct upside exposure in their trading books. On average, Bitcoin tends to rally by +23% during the pre-Christmas period (November + December).

Analysis

Three macro events of the last week are setting risk assets – stocks and crypto – up for a sizeable rally into year-end. All three events signal that interest rates have peaked for this cycle and that longer-dated bond yields should trade lower over the next year. Long-duration assets, such as shares of recently gone public (IPO) technology shares and crypto assets are the primary beneficiaries. This is also the first week when higher beta crypto assets outperformed Bitcoin and could signal that a massive rally is in the cards.

While Bitcoin is up +2.8% during the last week, Ethereum is up +5.5%, Ripple Labs XRP +13.5%, and Solana is up +28.3% on the back of the Solana Breakpoint but likely more importantly due to the strong tailwinds of liquidity that those three macro events are signaling.

First, the US Treasury Department is slowing the pace of issuing longer-dated debt – this is a slight reversal from the early July 2023 announcement, which caused 10-year bond yields to spike above 5.0%. Instead, the Treasury Department will issue more two- and five-year notes, which signals that the Treasury expects interest rates to decrease over the next few quarters.

Second, Fed Chair Powell was very dovish during the post-FOMC meeting press conference and opened the door to the possibility that inflation could also surprise on the downside. For the first time, Powell spoke about inflation risk being symmetric. He mentioned this twice, and it sounded like a victory lap in the Fed’s endeavor to bring inflation down. This would signal the possibility of rate cuts for 2024, but it is increasingly evident that there will be no more rate hikes for this cycle. The last rate hike was in July 2023. Powell also said that he does not see a recession. Overall, this FOMC press conference was very bullish for risk assets.

Third, Friday’s data release of the US Nonfarm payrolls report disappointed and signals a weakening labor market. This will also prevent the Fed from adding additional hikes, especially as Powell mentioned that we have not seen the effects of the previous hikes entirely play out, which tend to hit the economy with a lag.

In one of our recent reports (Echoes of 2017: CME Bitcoin Futures Launch Hints at +288% Returns!), we compared the current momentum driven by the BlackRock Bitcoin ETF application to the 2017 episode when the CME announced the launch of the Bitcoin Futures. Bitcoin prices continued to stay ‘overbought’ – based on the relative strength index (RSI) – from the announcement until the actual launch. Hence, it was too early to take profits. We also showed that once Bitcoin is trading in ‘overbought’ territory (RSI >70%), that prices tend to continue to rally, and we cautioned traders to take profit. It appears premature to cut any exposure before any US-listed Bitcoin ETF actually starts trading.

In our analysis titled ‘Buy the Fed’s Pause but Sell the Fed’s First Rate Cut‘ we showed that when the Fed concluded their interest rates hiking cycle in January 2019 after several hikes in 2018, Bitcoin prices exploded during the first half of 2019 and rallied almost by +400%. While we do not expect a rally of this magnitude, we suggested that Bitcoin could significantly advance in 2023 and 2024.

Bitcoin has historically experienced strong rallies in November and December and this year might not be any different. On average, Bitcoin tends to rally by +23% during those two months. With the macro tailwind plus the potential approval of a BlackRock Bitcoin ETF, we struggle to see why Bitcoin would trade lower. We are not worried by any overbought conditions. With beta crypto assets outperforming, the crypto rally might not only be focused on Bitcoin but could be broad-based. This is very bullish for crypto into year-end.

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.

AUTHOR(S)

Markus Thielen

Author of the book “Crypto Titans: How trillions were made and billions lost in the cryptocurrency markets”. More info about Markus can be found here.

RECENT ARTICLES

The post The Santa Claus Squeeze is coming appeared first on Deribit Insights.

Countdown to BlackRock ETF Approval: When will it happen?

https://insights.deribit.com/industry/countdown-to-blackrock-etf-approval-when-will-it-happen/

Summary: Traders are 86% confident that a Bitcoin ETF will come. We remain optimistic that the Bitcoin bull market continues, and pocketing extra yield through selling puts could juice up any returns for long-term holders. Trading calendar spreads is another way to position ahead of a potential SEC approval. Below, we run through some possible strategies.

Analysis

While we have no privileged information about the Bitcoin ETF approval process of the U.S. Securities and Exchange Commission (SEC), we can break down current market pricing to determine the most likely date traders expect the ETF decision to be released.

Since the BlackRock Bitcoin ETF filing on June 16, 2023, the discount of the Grayscale Bitcoin Trust (GBTC) has narrowed from -44% to just -14%. As the GBTC shares are not very liquid and a small discount is always justified for closed-end funds, the market is confident that the SEC will approve a US-listed Bitcoin ETF based on this narrow discount level. A straightforward assumption would flip this – 13% discount around and ‘assume’ that traders are 86% confident (100%-14%) that an ETF will be coming. That’s why Bitcoin prices rallied from 25,100 to 35,000.

Discount of GBTC shares to their net-asset-value

But as we showed in one of our previous reports, if the 2017 CME Bitcoin futures roadmap is seen as a trading reference, then Bitcoin prices might rally further on any announcement.

Bitcoin prices jumped +10% in a heartbeat when a false rumor hit the wires that the SEC had approved the BlackRock Bitcoin ETF already. While this turned out incorrect, it showed that Bitcoin could jump by +10% or more when the announcement is released to the market.

When Bitcoin prices rallied above 30,000 in October, many option market makers were caught short gamma. They had to buy upside exposure to hedge their books that sold calls previously to generate yield. This ‘gamma squeeze’ caused an accelerated move from 31,000 to 34,000 in a matter of hours. As a result, implied volatility was repriced from 30-35% to 50-60%. Yield-seeking traders can take advantage of those high implied volatility levels by selling options. Trading – and especially selling – options can be risky, but an educated analysis and prudent risk management could offer attractive risk-return opportunities. The coming three option expiries could be very interesting and rewarding for traders.

The most profitable trade will likely be a deep out-of-the-money call option that suddenly finds itself ‘in-the-money,’ but timing this event is the tricky part. When we analyze the at-the-money implied volatility for call options, we can see a big jump from the November 2023 expiry to December 2023 and from December 2023 to January 2024, while the implied volatility levels appear to peak immediately after January 2024. This indicates that the market expects the SEC to approve a Bitcoin ETF shortly before Christmas or sometime in January 2024.

At-the-money implied volatility for Bitcoin call options for different expiries

Taking this ‘market intelligence’ into account, we could sell an at-the-money call with expiry on November 24, 2023, for $1,545 and buy December 29, 2023, for $3,266 as approval by the end of this month appears less likely. This so-called calendar spread lowers the cost of trading options considerably.

We could be confident to sell this November upside as it would cheapen our December upside by 47%. Instead of buying a 1.0x upside call for the December expiry, we could purchase 1.5x December and sell 1.0x the November expiry call. If nothing happens in November, we could buy significantly more exposure into year-end.

If, instead of December, we prefer to have exposure until the end of January 2024, we would need to spend $4,370 on our at-the-money calls. Those costs can still be lowered by selling the November at-the-money call for $1,545, or 35% of our January call value. Hence, we could buy 1.35x as much upside.

Alternatively, traders could sell an at-the-money put for the January 2024 expiry and potentially pocked the premium of $3,575, roughly ~10%, for approximately the next ten weeks. We remain relatively confident that the Bitcoin bull market continues, and pocketing this extra yield could juice up any returns for long-term holders.

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.

AUTHOR(S)

Markus Thielen

Author of the book “Crypto Titans: How trillions were made and billions lost in the cryptocurrency markets”. More info about Markus can be found here.

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