TA Tuesday: Time for decentralised finance to shine

Now is the time for decentralised finance to shine as regulators try to avoid a bank run and an inflation spiral.

Week over week performance:

  • BTCUSD: 24,352, +19.8%
  • ETHUSD: 1,673, +16.4%
  • US02Y: 3.98%, -90 bps
  • DXY: 103.98, -1.84%
  • GOLD (USD/OZ): 1,910, +5.2%
  • NDX: 11,923, -3.09%
  • VIX: 26.81, +43%
  • VVIX: 114, +50.74%

On the macro side:

The past week has been a display of organised chaos.
Although that might appear normal in the crypto space, it did actually resemble the traditional finance’s GFC.

The consequences of an unexpected increase in interest rates are becoming apparent, and are affecting those who did not manage the interest book and have a riskier client base.

Most American banks with a lending business back about 70% of their customers’ deposits with Hold-to-Maturity (HTM) assets that have an approximate duration of 10 years. As per US GAAP regulations, unrealised profits or losses on those assets are not reported in financial statements because if held until maturity, the profit and loss would be equal to the interest income (yes, you read that right).

With an increasing interest rate environment, an extremely inverted yield curve, and a customer base that lives paycheck to paycheck, this is a recipe for a financial crisis trigger.

Many banks are facing a 20% loss on their assets that leverage their balance sheet, which puts them in a precarious position even if their NIM, LCR, and Capital Ratio seem healthy. This is because there is no public record of the hedges they have in place or the quality of their high-quality assets in their balance sheet.

However, the Treasury, the Fed, and the FDIC know these figures.

On Monday evening, the Fed committee held an extraordinary private meeting to discuss their next course of action.

The primary objective is to prevent a bank run, but if they reopen lending facilities, there is a high probability of triggering an inflation spiral.

In my opinion, the Fed may have already gone too far with its rate hikes. Therefore, I have revised my previous statement and believe that the Fed will hike 25 bps at the March meeting, reduce the QT programme, and stop more hikes going forward.
I anticipate that they will also establish lending facilities with banks, but they will not print money for everyone; they might go for some limits and requirements.

The situation will become clearer in the coming days. Until then, the market remains uncertain, presenting numerous opportunities for traders.

Also, looking on the economic calendar for the week, we had another boost of volatility indicators:

  1. Mar 14, US CPI (exp: 6% YoY; prev: 6.4% YoY)
  2. Mar 15, US PPI (exp: 0.3% MoM; prev: 0.7% MoM)
  3. Mar 16, US Building Permits

On the crypto side:

I believe that regulators are aiming to discredit cryptocurrencies by attributing them to the current banking failures. However, considering the pressing issues at hand, is such a campaign practical at this point in time?

Digital assets are a niche sector fueled by momentum and retail investment. In the short-term, if the negative sentiment continues, BTC and ETH prices are likely to soar.

However, settling transactions in US dollars is becoming increasingly difficult for crypto institutions, and market makers are once again assessing counterparty risks, leading to reduced liquidity in the markets. These factors will have an impact in the medium term, resulting in higher volatility and decreased institutional adoption.

In my opinion, this scenario presents the best business case for bitcoin, as it is arguably the only truly decentralised asset.

In terms of derivatives:

Short-term gamma has played particularly well, as the short-term volatilities rose above 100%. Nevertheless, the back-end did not really move as it is waiting for more sustainable movements.

My bias here is that long-term volatility keeps being a nice trade, and that short term-volatility is not over yet.

Other than just buying calls or low-delta strangles, I believe that call-spreads and a put-spread structure would better catch this trend.

Chart: BTC ATM Implied Volatility

Looking at the charts:

BTC is approaching the $25.2k resistance level. Should we break it, I can easily see the price at $30k. Then again, should things calm down, or should the volatility move to the downside, we might retest $20k first, followed by $18.5k.

We at Crypto Finance are aware of the uncertainty in the markets, and our trading operations will continue 24/7 for our clients. Please do not hesitate to reach out to us if you have any questions or want to know more.

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