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QCP Capital crypto market update - February 5, 2021

Commentaries & Views

Another consolidation week in BTC, as ETH continues grinding higher on yet another Defi wave and a massive increase in speculative leverage ahead of Monday’s CME ETH futures listing. The ETH futures open interest has increased 300% in just the past month and 50% in the past week alone, and we are now at $6bn OI even before CME opens for trading (Chart 1). To put this ETH OI in perspective, we never got past $6bn in BTC OI in all the many years of futures trading, even with CME, until November last year when all the traditional institutions became involved (Chart 2).

Surprisingly though the ETH implied vol has continued to trade in lock-step with BTC implieds, further correcting lower from the highs in the first week of Jan (Chart 3). The Put-Call skew has also not moved at all, implying there's been relatively little call buying in anticipation of a large move. For this reason, we've been holding off selling ETH calls in favour of BTC calls thus far. However for the same reason ETH puts are extremely attractive and we continue like to selling those, of higher delta and shorter tenors as the way to get exposure to the short-term trading upside here. Having said that we have a 9-13-9 TD reversal on the ETH daily coming up into the CME listing (Chart 4), so if we see any disappointment next week we'll begin scaling into calls there too - 3m implieds of 140% is still juicy in our opinion, even with the kind of realized volatility we see on ETH.

On the BTC side, the very wingy calls on Deribit - end-Jun 120k, end-Sep 160k & 200k, and especially end-Dec 300k & 400k, are still incredibly bid.

For reference these are the last printed USD per BTC:

1. end-Jun 120k - $1,621 per

2. end-Sep 160k - $2,993 per

3. end-Sep 200k - $1,829 per

4. end-Dec 300k - $2,421 per

5. end-Dec 400k - $1,678 per

Bridgewater’s piece out last week had a sensitivity analysis which showed their estimates of BTC price should private holders of Gold switch to BTC. They forecasted that should 50% of capital in Gold move into BTC, that would result in a price of $85,000 BTCUSD (Chart 5). We think that this estimate might be conservative but even if BTC were to overshoot, we think these calls might be overly rich and like selling any of these low delta calls on leverage as well.

Otherwise our strangle strategy is still yielding decently despite the further correction in implied vol and we like it on a 3 by 1 basis (3x puts & 1x calls). For example a 24k end-mar put with a 48k end-Feb call is still yielding roughly 100% annualized. So how long more can this consolidation go on for? In 2018 it lasted 6 weeks from the top before breaking lower, while in May last year it ranged for 11 weeks before breaking higher. This would be Week 5 of the current range, so we think next week is quite important especially with the ETH listing as well. We'll be watching to see how the parabolic on the spot & CME markets hold up, but our bias is for a longer correction in BTC where the all-time high remains (Charts 6 & 7).

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