BTC has rallied by 20% and ETH 27% since we posted our month-end Crypto Circular last week (https://docsend.com/view/tezqba537pce29d4).
To re-iterate, we formed a bullish view February for two keys reasons:
1. Moderation of market expectations for Fed hikes
2. Positive seasonality in February
Our bullishness been strengthened in the past week by some additional factors:
1. Real buying
Prices gapped higher literally seconds after the 8am UST option expiry on Friday. The buying pressure continued thereafter, indicating the move was not a one-off expiry-related flow but actual sizable demand in the market.
2. Crypto prices rallied even though NASDAQ traded lower towards the end of last week. We don’t think this means that crypto has necessarily decoupled from NASDAQ but this tells us there is tangible and targeted crypto demand right now.
3. Negative perp funding on many of the large derivatives exchanges (Chart 1) means that leveraged shorts are likely to get liquidated if prices continue to rally, adding more fuel to this short squeeze.
Given the absence of any significant macro events before the 17 February FOMC Minutes, we expect this upward momentum to continue.
Vols remain under tremendous pressure in spite of the fast rally in spot. BTC 1-week implieds traded close to the lows of 50% over the weekend! Levels have come up slightly now as spot breaks higher but remain in the low 60% handle across the curve. (Chart 2)
Position-wise, we took profit on our short skew (long puts vs. short calls) and flipped to a long skew position. This has probably been our best trade in the last two weeks with BTC 1-month skew rallying from -12% up to -2% and ETH 1-month skew from -16% to -7% (Chart 3).
The market is still very long gamma (short-tenor options) from the DOV strikes (BTC: 41,000–43000, ETH: 3,200). This would naturally cause some resistance up to around 45,000 in BTC and 3,400 in ETH (because market makers would be selling spot against the calls).
However, above those levels we suspect the market might start scrambling to cover shorts not just in spot but also in vols.
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