Key Takeaways
Looking back
For the second week running, we had a sharp BTC-driven rally during the New York Friday evening session. The rally took out $21.5/$21.7k, a key resistance level, and BTC moved quickly from there to $22.8k; and in weekend trading reached as high as $23,375. ETH again lagged, moving from the $1,520/$1,600 range to a $1,600/$1,680 range. There was not much other price action, although SHIB produced some excitement with a 20+% rally on Wednesday, and despite initially giving back gains, it has for the time being held at higher prices.
It is perhaps worth noting that BTC dominance continues to grind higher, up from 43% to 44% over the course of the week, and now well clear of the 39%-42% range it traded for the last 5 months of 2022. It can be easy to forget that BTC made up more than 70% of the crypto market cap as recently as January 2021, and whilst nobody realistically expects it to go back to that level, it could easily have a little more room to the topside from here.
Our client flows have been weighted towards the buy side for the majors, again with a preference for BTC. We saw better buying of XRP, BCH; and better selling of SOL, amongst others. By region, APAC clients were the strongest buyers; by client category we had selling from OTC brokers and retail brokers, and buying from funds, exchanges, and banks.
Futures basis has tightened again over the weekend, with March term futures for BTC and ETH all up around 1% annualised to 4.0% and 3.0% respectively. Swap basis for almost all coins is trading flat or in positive territory, meaning one can now get paid to borrow coins: a complete reversal from a few weeks ago.
In options land, front end vols ratcheted quickly higher on the rally again, indicating that the market needed to buy gamma during the move, or perhaps just a knee-jerk reaction to the surprise of BTC actually rallying after such a long bear. However, risk reversal are still at fairly benign levels, with the entire BTC 25 delta r/r curve between 1-3 vols for calls; and back end vols are still at historically low levels, with September BTC atm vol around 57.5%, indicating that traders are not yet participating in this move with any serious conviction.
Looking ahead
There are three main blocks of data out this week which are likely to impact risk sentiment: European PMI’s for Jan on Tuesday will tell us whether those, best placed to judge, think about whether the EU will avoid a recession; US Q4 GDP on Thursday (expectations for 2.6%, down from 3.2% in Q3); and finally major US tech earnings will be announced this week, which will tell us how those companies are managing pressure from rising rates.
The market also has one eye on the Fed (Wednesday 1st February), so could spend some of this week reducing long risk ahead of the weekend, as it would still be a surprise to see Powell pivot at this early stage.
The crypto market is now quite firmly split between those who believe this is a bear market rally driven by short covering, and those who feel that current prices simply represent a normalisation after the chaos of late 2022. The bulls are asking whether this momentum could lead us into a new cycle. BTC resistance at $25k is probably key: it would be a tough nut to crack, but prices above there would likely create a lot more interest from outsiders to get involved once again.
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