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Week in Review
- Textbook short squeeze explodes as rumours of Amazon accepting BTC hits the newswires. USD$1B+ worth of shorts get eaten up as the market flies. Note that this was outside our weekly data band, and is not reflected in this week’s return metrics.
- Previous sell-offs are wiped out as equity markets return to trading in highs, with US tech breaking out and Chinese stocks plunging. S&P 500 and Dow Jones’ Index and Nasdaq break through previous records.
- Nearly half of family offices own or are interested in crypto; Goldman Sachs survey.
- US Treasury Secretary Yellen urges adoption of stablecoin regulations. SEC Chair Gensler claims security-pegged stablecoins, such as stock tokens, must report to the SEC.
- Despite regulatory pressure on stablecoins, Mastercard partners with USDC for crypto payments pilot.
- JPMorgan set to give all wealth management clients access to crypto funds.
- European Commission plans to make Bitcoin transactions more traceable.
- Twitter CEO Jack Dorsey seeks to use Bitcoin for platform payments and e-commerce.
- Crypto exchange FTX valued at US$18 billion, following a US$900 million funding round.
- BNY Mellon joins State Street in backing a crypto trading platform.
- Crypto miner Core Scientific to go public through US$4.3 billion SPAC deal, seeks to merge with BlackRock-backed company.
- New Jersey attorney general issues cease and desist against BlockFi’s interest-bearing accounts; Texas and Vermont joins actions against the company.
Winners & Losers
- Bitcoin and Ethereum saw an early bleed before turning skyward back into the range. We’ve seen growing short interest from leveraged traders, whilst exchange flows signalled long-term holders and market makers were staying put. News that Amazon was looking at accepting Bitcoin as payment hit the wires today (26/07) during Asia, and we are yet to see how Europe and the US take the news. The early bids were met with illiquidity and an overtly short perpetual’s market, leading to a short squeeze higher in the majors, which has spilled into the rest of the market. BTC ended last week at US$32,273 and now trades at US$38,000 after the squeeze. ETH ended last week at US$2,022 and now trades at US$2,328.
- Despite some early concerns over the Delta Covid variant, equities have driven higher – helped by strong quarterly earnings in the US. The NASDAQ has outperformed the DOW and S&P 500, leaving many to wonder how far tech can go before they come up for air. At the moment they are looking unstoppable despite some price to earnings ratios that are approaching levels in the 70s.
- The US10Y treasury yields continued the downtrend this week, despite a slightly higher weekly close. Earnings and more signs of global stimulus have helped continue the bleed lower. The week finished with the US10Y sitting at 1.28%, down from 1.74% in March. We still feel that the market is underpricing the risk of inflation. Given where the VIX is sitting, there’s a good opportunity to hedge out any shocks at a reasonable price. However, it’s rare that insurance is bought when it’s cheap. It’s generally bought by the broader market when expensive and the crowd is piling in.
- Despite assets moving skyward, and inflation metrics continuing to show cracks in the armour – the Fed will keep its benchmark rate unchanged on Wednesday. Read the FOMC statement, and look for signs of taper. This could be a trigger for the next hints in market sentiment.
- Gold has had a relatively muted week on USD strength and a risk-on environment, ending the week US$2,022.
Macro, Technicals & Order Flow
Week ending – 25th July, 2021
Current trading session – 26th July, 2021
- Always a spectacle to watch a short squeeze play out. The signals are usually there although, more often than not, clearer in hindsight. Growing open interest, an overly short leveraged market and implied volatility that had crossed below realised vols. They don’t say that “volatility is mean reverting” for nothing. The match to the flame was rumours of Amazon accepting BTC. These rumours are so far unconfirmed, with speculation building off an Amazon job ad for a Digital Currency Expert.
- Key level from here is 40,000 with prior highs between 41,000 and 42,000. Interestingly, price is holding onto the squeeze. Normally I’d expect more of a retracement given a topside cleanout. We have a feeling the market is waiting on Europe and the US sessions, plus confirmation of Amazon news from the rumour mill.
BTC Aggregated Liquidations
- Last week we mentioned that if Implied vols continue to drop we may see a beautiful mean reversion play on volatility. IV vs RV below illustrates the dislocation occurring.
BTC ATM Implied Volatility vs Realised Volatility
BTC ATM Implied Volatility
Total BTC Options Open Interest
BTC Futures – Aggregated Open Interest
- Perpetual funding rates have been negative all week – showing more shorts on the book by a significant margin, adding to the move.
BTC Perpetual Swaps Funding
- Where to from here? The VIX is still fairly depressed (cheap?), equity markets are hitting the gas, and liquidity looks fairly abundant. The Amazon news and short squeeze may have been the trigger the market needed for some activity. Tough to tell whether we’ll see follow-through, but the range is now clearly defined and newsflow is picking up from the likes of JPM and other institutions again.
BTC Futures Annualised Rolling 1 Mth Basis
BTC Futures Annualised Basis – Current
Bitcoin Net Transfer Volume from/to Exchanges
Probability of BTC being above x$ per maturity
Grayscale Bitcoin Trust (GBTC) Premium
Week ending – 25th July, 2021
Current trading session – 26th July, 2021
- Ethereum naturally followed the squeeze, but had more indicators going its way over the past week. Exchange flows had clearly turned bullish, with significant outflows relative to prior bullish moves. Couple this with leveraged short interest, and we get a smart vs fast money paradigm. It’s generally the smart money that walks with their wallet intact.
- Key levels for ETH are the prior highs of 2,400. A break above here could see the 3,000 level being targeted again. Fundamentally ETH remains strong with its upcoming fork and consequent supply shifts. This sits alongside a raging equity market, led by tech. Interesting situation, but one that could flip at any time given inflation or earnings shocks.
Ethereum Exchange Net Position Change
Ethereum Net Transfer Volume from/to Exchanges
ETH Perpetual Swaps Funding
ETH Futures Annualised Rolling 1 Mth Basis
ETH Futures Aggregate Open Interest
BTC Options – Aggregated Open Interest
Probability of ETH being above x$ per maturity
- The amount of ETH in the ETH 2.0 staking contract currently sits at 6,405,691. This represents 5.48% of the total supply estimated to remain locked for ~ one year, continuing to slowly constrict supply.
- In summary, we mentioned watching the NASDAQ and VIX last week. ETH is looking to follow that lead. On-chain indicators and the recent squeeze are clearly bullish for the short-term, with the upcoming network upgrade a boost for investor confidence. It’s still not a clear medium-term bull run, but we are making some strides.
DeFi & Innovation
- Ethereum co-founder promotes developments beyond DeFi and into social media.
- Grayscale set to launch a DeFi fund and index.
- Terra raises $150 million in funding round towards DeFi Ecosystem Fund.
- Polygon launches blockchain gaming and NFT studio.
- MakerDAO moving into full decentralisation; foundation set to close soon.
- DeFiance Media launches a 24/7 crypto broadcast channel to 65 million households.
What to Watch
- We mentioned potential mean reversion from volatility and it seems like our predictions are currently on the move, as Bitcoin and Ethereum lead the pack with major surges over just the last few hours. Bitcoin has moved above the 50-day moving average, with more than $1B+ in shorts liquidated in mere hours. Could this be the trend reversal? It’s very early to tell, but the move is impressive nonetheless. Volatility is growing and economic uncertainty still shadows the global markets, so an extra week of caution could be well warranted to truly make sense of where we might be heading.
- Crypto crackdown media flows expanded from China’s well-known ban into stablecoin scrutiny in the United States. From Fed Chair Powell mentioning the regulatory needs two weeks ago to Yellen and Gensler urging the government to establish rules for the fiat-pegged assets, it seems the attention has quickly diverted from the usual Bitcoin and Ethereum protocols. For now, the regulatory focus on stablecoins is more interesting than concerning, as it begs the question of the real motives behind it. Could this urgency reflect the Fed and White House’s reaction to US inflation, under fears of traditional market outflows into digital assets? Or simply a recognition of how fast the crypto market has grown without proper regulations, as previously stated by these officials? We look forward to more news and announcements to shine a light on their plans for stablecoins.
This document has been prepared by Zerocap Pty Ltd, its directors, employees and agents for information purposes only and by no means constitutes a solicitation to investment or disinvestment. The views expressed in this update reflect the analysts’ personal opinions about the cryptocurrencies. These views may change without notice and are subject to market conditions. All data used in the update are between 19 Jul. 2021 0:00 UTC to 26 Jul. 2021 23:59 UTC from TradingView. Contents presented may be subject to errors. The updates are for personal use only and should not be republished or redistributed. Zerocap Pty Ltd reserves the right of final interpretation for the content herein above.
* Index used:
|Bitcoin||Ethereum||Gold||Equities||High Yield Corporate Bonds||Commodities||TreasuryYields|
|BTC||ETH||PAXG||S&P 500, ASX 200, VT||HYG||CRBQX||U.S. 10Y|