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21 June 2022

TA Tuesday: Market-wide de-leveraging also hurts bitcoin

Crypto Finance Team

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De-leveraging.

Before we start talking about prices, technicals, derivatives, and macroeconomics, I would like to emphasise that digital assets, Web 3.0, DeFi, and smart contracts are not about the price of a coin. Instead, they are about the technology and the disruptive innovation that they aim to achieve in the areas of e.g. Finance, Informatics, and Legal.

The price of a token – whether it is a governance, utility, or payment token – is the value agreed upon by the market participants in terms of its utility.

As of today, most blockchains are working successfully and also evolving; DeFi is working, and smart contracts keep running. Institutions and companies involved are growing and building at an incredibly fast pace.

What is happening today:

  1. Crypto-specific: de-leveraging driven by bad usage of financial tools and “extreme” financial engineering
  2. Macro related: de-risking driven by stagflation and monetary policies

Most of us have been aware of the implied leverage in the crypto space. Just have a look at what you can do and achieve with $100. Collateral managing is tough. And even more so in such a leveraged and volatile market. Then, ultimately, it is just about economics: what is happening to companies like Celsius is just a duration mismatch coupled with massive loans’ rehypothecation. And what is happening to companies like 3AC is just a bad margining system that did not account for fat tails events. My guess is that the cascade has just begun, and many other protocols and companies will be impacted. There will be a hard clean-up, and then we can start anew.

On the macroeconomic side: the free-money era has ended. The stimulus that aimed to help the economy did not work out. “Now” it is time to take the reins and “repair” the damages. It is unclear how much it will hurt, and if it even will be enough. I believe that there is more room out there for more pain.

The Fed’s dual mandate is maximum employment and stable prices and moderate long-term interest rates. The fact that market prices are reacting to this is an implied consequence.

Now… on to the macro side: the Fed hiked rates by 75bps, and with a 99.5% probability, the market is pricing another 75bps hike for July 27th. Will it be enough to calm inflation down? Whether CPI is a lagging indicator and might not be an accurate method to estimate the inflation, there is no doubt that inflation is high. But inflation is also all about expectations: rising inflation makes people believe that prices will go up again in the future causing them to demand wage increases and not delay purchases. In my opinion, the current role of the Fed – and all others central banks – is to make sure that the market participants believe that these monetary policies will be enough.

SNB raised the interest on sight deposits to -0.25%, which also  increases the demand for CHF. EURCHF is -1.07% MoM, and USDCHF is -0.46% MoM. I still believe that the parity against the EUR is sustainable and achievable, while it is hard to imagine USDCHF above parity even in a high inflation and high rate environment.

DXY is now at 104.32 after bridging 105 on June 15th for the first time since December 2002. US Government Bonds 10y Yield is now 3.284%, and the term structure did not see a parallel shift, but is rather showing a steeper frontend (10y Yield minus 2y Yield: 0.08), and a flatter backend (30y Yield minus 10y Yield: 0.054%). It is also inverted for some maturities as the 3-Year Yield is higher than the 5y, 7y, 10y, and 30y.

I still believe that there is more space here for high rates.

On the crypto side: on Saturday, major support levels broke with BTC trading as low as $17,567, and ETH at $879.

At the time of writing, $BTC is trading at $21,077, and $ETH is at $1,156. Both are slightly below the 200-week MA (BTC: $22,425 and ETH: $1,200).

Looking at the VPVR:

BTC support: $20k and $15k

BTC resistance: $25k and $30k

On the derivatives side:

Futures Open Interest decreased slightly. This was a consequence of both deleveraging and de-risking, and is now $9.4B for BTC and $4.3B for ETH. The bases are stable with the 3-month trading at a 2.87% premium on CME. Funding rates are now flat, and have recovered from last week’s  negative territory.

The options market went crazy. BTC ATM iVol traded as high as 197% for one-week maturities on June 15th, and 243% for ETH. Now, the term structure is still in backwardation, and given the current market uncertainty, I will wait for the event to decouple before taking a directional bet on the term structure.

Skews were definitely in favour of puts as a result of hedging demand and speculations, and they are still very expensive: BTC 3mth 25d skew is now trading at 17% after peaking at 29%! And the ETH one is at 17% after peaking at 27%.

Looking at the Open Interest Profile, June 24th is the largest expiry date with $116.9k Open Interest on BTC. Levels to watch are $15k (support) as there is still some gamma out there and $25k (resistance).

Happy trading!

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