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QCP Capital crypto market update - June 02, 2020

Commentaries & Views

BTC price spiked 9% to highs of 10428 in thin liquidity at the end of the US session and just ahead of Asia open on the back of liquidations as usual ($100M worth of liquidations on Bitmex alone). The 10k psychological level was easily broken but the 10.5k level is providing significant resistance.

We see this as a possible near-term top with multiple TD reversal signals in play -a weekly TD 9 (confirmed), a daily TD 13 (confirmed), as well as a daily TD 9 on Thursday (if we stay above 9500). With that said, a clean break above the 10.5k level could be the trigger for another leg higher.

We continue to favour selling puts out to the 2m tenor and have rolled some of our 6k puts higher to 8k levels.

Some market observations:

Increase in options volume - We've seen a significant shift of capital out of lending markets to be deployed in options strategies. Two key reasons for this. Firstly, the returns from options strategies are significantly higher with mitigated risk (if properly managed). Secondly, lending is subject to significant credit risk as the borrowing/lending platforms rehypothecate loans on multiple levels so these loans could be wiped out on a default event a few steps removed. It's also telling when borrowing/lending platforms have themselves also been deploying borrowed holdings into options strategies to make supernormal returns.

Normalisation of Put skew - Put skew has normalised substantially in the past week alone - and we are now seeing a deeply negative Put skew all along the curve out to 6m tenor, where Calls have become more expensive than Puts again. The one month skew for example - has gone from having a 20% premium for Puts just last Monday to a 10% discount today. Much of this has to do with the month-end expiry where long Puts have rolled off without new buying due to bullish sentiment. On the other hand, short Put positions have all been rolled pushing implied volatility lower and causing the negative Put skew.

Macro correlations - With BTC looking more and more a macro product now, many were looking for answers related to safe-haven flows on the back of US protests, or catching up to the broad USD sell-off in recent days. However to us this move is still idiosyncratic and BTC is still trading with low correlations to other markets outside crypto. The recent USD sell-off has been primarily against risk currencies (on the back of a sharp bounce in risk sentiment following Trump's toothless declaration on China last Friday), and more closely related assets like Gold or USDJPY have not moved as the risk-off/USD dumping narrative would suggest.

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