BTC has rallied the past week to $56,700, a level last seen in May, and in so doing, has shrugged off the news creating a negative tone in wider risk sentiment (tapering fears; potential US default; China real estate; energy supply shock). This possibly suggests that BTC is gaining traction as an inflation-hedge / risk-off asset. That theory is bolstered by the fact that most other cryptos have lost ground on BTC crosses, as investors rotate out of higher risk ETH and alts into BTC. ETHBTC has dropped from the 0.068/0.072 area to a recent low of 0.062.

Flows over the past week have been moderately biased to the buyside. More interesting, however, is the fact that crypto exchanges continue to be the notable outlier, as the only category net selling overall, implying that this move may be driven primarily by institutional money, with retail on the sidelines. Across different coins, as expected, BTC is seeing strong buying, flows more even in ETH. We have seen exceptionally strong buy flows in UNI and ADA, while XTZ continues to be sold as participants take profit following recent highs.

In the futures market we’ve seen noted weakness in perps basis related to short positions on Chinese exchanges, some of which were liquidated during the sharp rally through $53k last week. Longer dated basis continues to drive higher, supporting our thesis that most buying is institutional, while retail remains sidelined. Annualised basis for Dec BTC futures on Deribit currently sits near 12%, up from 8% last week, and 5% two weeks ago.

One other observation from the futures market really stands out: a marked uptick in CME basis. CME is typically a venue for large US institutions, who cannot face unregulated exchanges, and these players have until now focused on playing the cash and carry trade, keeping the basis suppressed relative to unregulated exchanges. Currently, however, end-Oct CME annualised basis has risen to 20%, as high as any other exchange basis, indicating a qualitative change in activity on CME, away from cash and carry to outright buying.

In options, after a short surge towards call buying, the market has turned notably more defensive. BTC 1 week 25 delta skew got as high as 3 vol for calls, it’s now back to 5 vol for puts, on the back of outright call selling and put spread buying for end-Oct. Strangely, ETH riskies have actually softened from 9 to only 3 vol for puts. In terms of contango, the vol curves have flattened a little, while the market bought gamma during the move, but ultimately not much structural change over the week, as the market remains short BTC calls for year end. Also worth remembering that the US debt ceiling issue has been averted only until December, which may yet coincide with the short vol on all those Dec BTC calls, which are currently holding up back end vols and riskies.

Macro-wise, the coming week will be all about the US inflation data on Wednesday, plus of course the Fed minutes the same day.

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