The Times They Are a-Changin’
14th April 2022
Q9 Capital: www.q9capital.com
- Crypto and capital markets down following Tuesday’s CPI publication
- ETH options skew heavily towards puts
- Financial advisers increasing allocation to crypto
Crypto followed traditional assets lower this week as BTC traded below $40k for the first time in three weeks, followed by a rebound recovering some of the losses yesterday. ETH continued to show strength relative to BTC, ETH dropped -3.4% while Bitcoin dropped -5.4% over the past seven days, among other large caps Terra Luna took the max damage dropping over -15%.
These declines came as the case for a 50bps points interest rate hike from the Fed next month has strengthened in the wake of Tuesday’s hotter-than-expected inflation release, hitting 8.5% in March. The consumer price index, a price measurement for all basic living items, finds itself at its highest point since December 1981, according to the Labor Department.
In an environment of historically low bond yields, capital markets are easily spooked by elevated inflation readings hitting multi-decade highs and the un-investability of bonds. As we wrote last week, higher rates mean crushing inflation sooner and movement out of inflation hedges including BTC. On the downside, Bitcoin is trading in tandem with equity markets, in particular, the Nasdaq 100 Index. The assets have a 0.85 correlation over the past four weeks of trading. At least that’s the conventional wisdom. If inflation is already 8%, then even if we get some strong rate hikes this year we will probably be in a very loose monetary regime until we actually get short rates higher. This is good for companies with ‘real’ earnings, decent multiples and inflation hedges.
BTC Nasdaq Futures 28-Day Rolling Correlation
Simple Twist of Fate
Options traders have seemingly turned bearish for Ethereum in the near-term as volume skews rather heavily towards puts as compared to BTC in the same expiry period.
Meanwhile, BTC options traders seem to be undecided on where the market will head in the near term.
Like many times in market structure, perhaps nothing is to be made of this. ETH outperformed lately and maybe winners are buying protection. There are those who may be hedging the ‘merge’ in ETH, but the timing is too short. (If ever the market needed a perpetual option they need it for the ‘merge’). In general though, we do see the options market longer more calls than puts from overwriting in options vaults. This product is quite similar to Q9’s YIELD. Investors receive a high yield upfront from selling optionality or capping their potential gains. Right now, they are more interested in selling higher than buying lower.
Shelter From the Storm
After ProShares filed earlier this week to launch a “Short Bitcoin Strategy ETF” that would allow investors to take inverse bets against Bitcoin, two other fund issuers followed suit.
The ProShares Short Bitcoin Strategy ETF would seek investment results corresponding to the inverse (-1x) of the return of the CME Bitcoin Futures Contracts Index for a single day.
This relatively common product in the traditional ETF marketplace allows investors to bet against the rise in prices and profit if the price of the underlying goes south. The newly-filed ETF has a June listing target but has yet to get the nod from the SEC, which could see this being delayed.
All Along the Watchtower
Despite the recent volatility, financial advisors are taking a broader interest in Bitcoin and other cryptocurrencies.
In a Nasdaq survey of 500 financial advisors whom are already allocated or consider allocation towards bitcoin and other cryptocurrency-based products, 72% would invest more heavily into the space if a spot exchange-traded fund (ETF) was approved.
Nasdaq’s survey found that 86% of advisors who pre-allocated to Bitcoin or other cryptocurrencies plan to increase allocation over the next 12 months, while none of them intend to subtract from their portfolios. Of the same sample class, 50% are already using bitcoin-based ETF futures and another 28% intend to within 12 months.
According to a January survey from Bitwise, financial professionals allocating to Bitcoin and other products had risen to 15%, up from 9% in the previous year. These numbers lend to a responsible expectation of adoption for financial professionals as they show we still have quite a long way to go.
However, less than 9% of advisors are confident in their ability to expertly advise clients within the asset class, denoting an educational gap between traditional finance and an emerging monetary system.
Furthermore, most financial advisers still prefer to offer their clients crypto wrapped in a product — a fund, a trust, a proxy, a futures ETF — so that they can offer the asset through their own TradFi pipes. Very few actually provide their clients with a direct allocation to crypto via the spot market… mainly because they can’t.
In some respects, this is like getting the mailman to deliver your emails. Owning crypto via a product or proxy means that it’s held in “old-school tech” — You lose out on all the associated benefits and utility… except the price appreciation. You don’t own it, you can’t trade it instantly 24/7, you can’t transfer it P2P or across borders and you can’t lend it out or post it elsewhere. When you invest in an ETF the fund holds your shares, they can lend out the stock but you don’t’ have that utility. If you own a portfolio crypto those coins are yours and you can keep the exposure and lend them, put them in an AMM or post them as collateral for derivatives trades. This is what crypto is all about, you hold the coins, so you hold the value. Native investment solutions that give you all the upside and utility of crypto are what is being build now and exactly what Q9 Capital does. Nevertheless, even traditional products which bring investors one step closer to true crypto value is good news. It’s a start and it’s getting more people involved in the space.
Like a Rolling Stone
So are we now going to see Blood on the Tracks or an Alt-Coin Hurricane? Markets work in mysterious ways. There are infinite factors, data and information manifested in a single price and its movement.
All the background noise can be overwhelming. Prices may be trending down and the short-term sentiment appears risk-off in the face of rising interest rates, record inflation and the global macro backdrop. As Bob Dylan pronounced: “There must be some way out of here”, Said the joker to the thief, “There’s too much confusion, I can’t get no relief”.
Yet the long term, the picture looks much rosier. Appetite, adoption, and curiosity continue to gather pace like a rolling stone:
- Traditional finance continues to build and allocate. This week Blackrock and Fidelity backed Circle, the issuer of USDC, in a $400mn funding round, and Goldman Sachs invested in blockchain security firm Certik’s $88mn funding round.
- Crypto conferences are attracting record numbers. After Bitcoin 2022 Miami, a plethora of large scale gatherings are taking place across the globe including Paris Blockchain Week, New York Fintech Week, FTX Crypto Bahamas, Consensus, Austin, Texas and many others.
- Retail interest is gathering pace. Crypto exchange traffic increased to 360mn visits in March, a 6.1% month-over-month increase.
- Governments are getting on side. Binance gained in-principal approval in Abu Dhabi; Brazil confirmed its CBDC pilot will launch in 2022; and the Senate Republicans Policy Committee published a policy paper called “Cryptocurrency Goes Mainstream”, signalling a more cohesive policy position down the road.
With so much institutional adoption and venture capital assets betting on the crypto space, the future looks bright. Behind the daily price movements, the crypto market is creating an alternate universe of finance, commerce, and investment which is profoundly transforming the global economy and disrupting entire industries. It is reshaping the way people borrow and save and is remaking banking as we know it. There’s still a long way to go for the patient investor.
Don’t Think Twice, It’s Alright.
In the News…
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- Indian investors alarmed as crypto exchanges block transfer network
- State of Avalanche Q1 2022
- Justin Bieber, Snoop Dogg and other celebrities pour millions into crypto startup MoonPay
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- Museums in the metaverse: How Web3 technology can help historical sites
- 10 crypto influencers you should be following
Crypto Markets
- BTC & ETH continued to slide posting loses of -5.4% & -3.6% respectively on the week (8am). The total market cap of the crypto market dropped below $2tln mark and Bitcoin dominance fell below 41%
- Among other majors, both SOL nosedived -11.6%, among DeFi platforms AAVE fell -12% this week
- While the markets saw a drop, the annualized realized volatility in crypto markets did not move much, 67% for BTC and 78% for ETH this week
Legacy Markets
- Oil futures jumped +7.2%, US inflation rose to the highest since 1981, pushing the FED further to hike interest rates more aggressively
- US Equities (SPX) was down -0.8% week on week after yesterday’s tech rally helped recovering some losses incurred from big moves down earlier this week
- The US Dollar index rose 10bps, 10 Year US treasury yields advanced +10bps and the Gold & Silver index rallied +6.1%
Our Flows
- Even sided flow on client pad slightly (1.4x) skewed towards buying during last week
- Two way activity in ETH
- Buyers in SOL and BTC
Q9 Capital: www.q9capital.com
