The Fed hiked rates by 75 bps last Wednesday. As expected, oversold markets experienced a relief rally. However, this was short lived as headlines of large write-offs and insolvencies by borrow/lend players continued.
Blockfi and Genesis made public statements about their exposure to the fallout. And given the immense size of the defaults, almost every trading desk or fund with a credit business was significantly impacted.
The next to announce financial difficulties was Babel, freezing all client withdrawals. At the same time, the market was getting hit by ongoing liquidations of stETH, ETH for debt repayments on Aave as well as miners who had been moving large amounts of coin onto exchanges to sell.
On Saturday, support levels broke with BTC collapsing to 17,567 and ETH to 879. For BTC, this is a 75% drawdown from all-time highs (82% for ETH). The crypto credit crisis in full swing.
However, we were pleasantly surprised by the strong bounce off the lows on Sunday and into this week, taking BTC back above 20,000 and ETH above 1,100. With prices stabilising at these levels, where do we go from here?
We have reason to be positive in the near-term for the following reasons:
1. The selling into the lows was less leveraged liquidations and more miners reducing inventory. Funding rates have also started to normalize.
2. Downside fear is reduced. Vols have normalized with BTC front-end lower by about 50%. BTC from above 150% down to 96% and ETH from 178% to 130%.
3. Sharp funds and desks are starting to put on bullish structures in size. These include call spreads, call butterflies, call ERKOs as well as long vanilla calls (mostly short-dated). As a result risk reversal (call minus put) levels have jumped with BTC 1-month RR sharply higher from -48% to above -20% and ETH from -52% to -25%.
4. Macro factors are also lending short-term support. Oil prices have dropped from above 123 to below 110. Other commodities have followed suit as well. This is significant as it reduces inflationary pressure, allowing the Fed to ease up on their tightening stance. A big positive for markets all round.
With that said, we remain on guard. Quarter-end fund redemptions are likely to put some pressure on prices along with the possibility of more crypto insolvencies being unearthed.
We are still keeping the book fairly nimble. We had turned very short vols from large buy vol flows over the weekend. But with the softening of front-end vols, we have been able to take-profit and reduce our position.
We are currently running short gamma (shorter-term options) and short vega (longer-term options) in BTC and ETH against a smaller long vol position in the Alts (most significantly long SOL downside). We have also put on some of the mentioned bullish call structures in BTC and ETH to position for short-term upside.
