This mini bull-run in the last 10 days has been a pleasant surprise for all. Especially since it started on the back of a shockingly high inflation print (9.1%) on Wednesday last week.
From a post-CPI low of 18,892 in BTC and 1,005 in ETH, prices have broken the topside of the range reaching 24,288 in BTC and 1,631 in ETH (+28.6% and +62.3% respectively!)
ETH has been a clear leader in this run-up, driven by new clarity on the ETH merge (now expected to happen on 19 September). An interesting correlation has also been the spike in Cryptopunk volumes coinciding with the bottoming and breakout of ETH price (Chart 1).
Chart 1
Positive macro factors have also been the core reason for the uplift in crypto and also across most asset classes:
1. Since the high CPI print, the market has been decisively pricing out the probability of a 100bps hike in the July FOMC. Currently, a 20% chance of 100bps is still being priced in but our view is that 75bps is the most the Fed will do. So expect another boost as 100 bps gets completely priced out.
2. Inflation is showing signs of peaking. Oil prices are testing pre-Ukraine levels.
The short-squeeze was most keenly felt in the option market. There was a mad rush to buy ETH topside (calls – especially the September expiry), as both trading desks and funds covered shorts and put on bullish ‘merge’ trades, driving September ETH vols from 85% to 100% and the risk reversal (calls minus puts) from -19% to -4%.
We were positioned well from our last update. Long topside gamma (short-term options), long rega (longer vols with higher spot price) as well as long call wings (far strike options). We’ve taken profit on a large chunk of these but remain long the end-July vol bucket as we head into FOMC on 27 July along with US Q2 GDP and all the large US Megacap Tech Q2 Earnings.
In terms of spot direction, we are not sure if the upside momentum continues in a big way. The speed of this move higher felt positioning-driven (market was caught short) and the market is starting to show some signs of exhaustion.
Yesterday, we saw massive selling of longer-end ETH calls, causing the risk reversal to drop sharply back down to -10%.
There has also been more news of potential insolvencies with Zipmex suspending withdrawals this week, rumours of further difficulties at Hodlnaut as well as miners across the globe looking for bailouts.
The 3AC creditor meeting on Monday also revealed a shocking $1.2 billion impairment being claimed by Genesis Trading (by far the highest of the total $3 billion in default claims so far) and Babel has yet to provide any updates on the status of their debt restructuring.
While the markets have been sanguine, it’s possible that the credit contagion is not completely over yet. We have been adding to our downside skew position and we are keeping slightly long gamma and vega (longer term options). We will be closely observing upcoming economic releases to get a better sense of macro direction.
