It has been a very busy week in crypto and at Crypto Finance AG. We have focused on maintaining liquidity for our clients during what has been a very volatile (and for some a very hostile) period. Over the last week we were market making and maintaining liquidity in 200+ markets via linear products, and we saw the most diverse behaviours, almost all of which were reflected in our clients as well.
Trading desk activity: overall, our trading desk was skewed on the sell side, but notably, as the market was in sell-off mode, we saw a major rotation into BTC (buy/sell ratio: 8.2:1) and ETH (buy/sell ratio: 3.3:1) in the effort to get away from the riskier assets, e.g. alts and DeFi. Note: BCH b/s 0.01:1, XRP b/s 0.14:1, CRV b/s 0.08:1, SNX b/s 0.11:1, DYDX b/s 0.31:1.
In terms of stablecoins: following the collapse of the TERRA ecosystem USDT (USDTerra), and as fear grew about a regulatory clampdown, we were only sellers of USDT (USD Tether) and USDC (USD Coin) b/s: 0.33:1.
In terms of FX: for the fist time in weeks we were sellers of USD (b/s: 0.2:1) and buyers of EUR (b/s: 6.9:1), while almost neutral on CHF (b/s: 1.08:1).
On the spot side: at the time of writing, $BTC is trading at $30,295 (-2.29% in 7 days), $ETH is trading at $2,070 (-11.58% in 7 days), and so the ETH/BTC spread is trading at 0.06833 (-9.53% in 7 days).
While BTC seems to have found a strong support on the $30K level, a major rotation in all the other digital coins is still ongoing.
As realised volatility peaked, many pairs starts decoupling and others regained, notably:
1. SAND/MANA is now trading at 1.115 after having peaked at 1.70 on May 12, 2022 (many interesting plays here, given the different tokenomics and market cap)
2. 1INCH/MATIC is now trading at 1.3326 after a long digression (in March it was trading at 0.88).
If macro keeps being hostile and the ETH merge does not materialise, we are going to see greater BTC dominance as $ETH is likely to bounce back. Otherwise, an $ETH exploit L2s sell-off might happen soon.
Then… the BTCUSD daily chart with Heikin Ashi candles called a buy on May 14 as the realised vol peaked and the open/close spread was tight.
Looking at the VPVR:
Support: $30k (indicative)
On the futures side: despite the spot sell-off, the BTC Basis is holding particularly well, with the 3m basis on CME trading at a 2.07% premium.
Excluding ETH, GRT, AAVE, and DOGE, all the other futures traded on FTX are now in backwardation. Should things get even worse, carry trades will be out of the game.
Important to note is that as USDT decoupled on May 12, the funding rates on Binance and FTX flipped, as traders were getting long leveraged positions on BTC-PERP within FTX and short positions within Binance. This strategy left traders long USDT/USD to bet on the USDT re-peg, leveraging the positions with low funding and borrowing costs and greater liquidity and scalability.
On the options side: I have been calling for long vol strategies for a month now, but I was not expecting something like this.
BTC 3m ATM IV went from 56% to 100%, and the 3m skew went from 9% to 20%!
The BTC ATM IV term structure is still inverted with short-term maturities trading at 77+ IV and the long-term ones slightly above 70%.
As most of the long vol and long wing positions outperformed, most of the traders unwinged their positions, and the market is now normalising. As spot prices have likely bottomed (at least in the short term), volatility has likely peaked… It is therefore time to short vol and let the term structure revert again.