Key Takeaways

• Crypto market rips higher on short liquidations and lack of selling
• BTC a leader; final leg of rally was $1,200 in only 1 hour
• SOL a massive out-performer, rallying more than 50%
• Short liquidations the major driver of the moves
• Term futures basis higher as market suddenly feels a little short of USD liquidity
• Vol curves inverted as market rushes to cover gamma shorts

Looking back

BTC was grinding higher from $17 to $17.5k from Monday to Wednesday, then on Thursday morning in Asia it spiked through $17.6k to $18.3k, and later on in the NY morning it spiked again to $19.1k. Then 24 hours later, the last leg of the rally started, and it was the most fierce, rallying from $19k to $21.3k in about 12 hours, with the final spurt from $20k all the way to $21.3k in 1 brutal hour as Asia woke up on Saturday morning. Since then we have carved out a short term range bull flag in a $20,250 to $21,250 range.  That move from $17k to $21k basically retraces the entire FTX drop, and brings us to a key level around $21,500.

ETH outperformed BTC slightly earlier in the week, but has underperformed since, and over the week ETH:BTC is largely unchanged.  Out-performers in the larger cap assets were SOL, which rallied more than 50% from $16 to touch $25 over the weekend; and DOT which rallied +20% on the same move to $6.50.

The primary reason for the speed of the moves appears to be short liquidations, which have hit a high point since July 2021 when BTC bottomed at around $30k and ripped higher.   BTC liquidations for the period from 11-14 Jan totalled around $300m, with $125m alone on 14 Jan, while total crypto short liquidations for the same three (3) day period are estimated at $775m.

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BTC flows over the past week have been 52.6% buyers, with ETH more evenly split.  In terms of other coins, we had good selling of DOGE, LINK, DOT and BNB, and good buying of XRP, SOL, ADA, XTZ and EOS.  By category, our best buyers by far were exchanges, and by region, APAC and EMEA were buyers, Americas were sellers

Given the massive short liquidations, futures basis has predictably tightened.  On Binance, while perp basis hasn’t moved that much higher, March futures basis is up around 1% for BTC and 0.5% for ETH, and on Deribit the March futures are up 2% for BTC and 1% for ETH.  CME arbs are wide open with Jan BTC futures trading at an annualised 11% over spot, and Jan ETH futures at an annualised 7% over spot.  

Vols are as bid now as they were offered a week ago. BTC realised volatility has undergone a regime change, moving from 20% to 70% on a 5 day horizon.  As a result, the front end of the curves - where gamma is the most concentrated risk - have had the biggest moves.  Jan BTC vol is up from 35% to 70% on the week.  Further back on the curve, where vega is the bigger risk, prices tend to move when traders believe in a longer term move. Jun ATM vols are up from 52% to 60%, which represents a significant move, but in a historical context, 60% is still quite low; the implication being that not many believe this move has legs.  ETH vols remain quite tight to BTC, with the whole curve now only 5-10 vols premium to BTC, probably as a result of 2 factors; firstly the huge supply of vega which was given to the market over Christmas, and secondly, the weakness of ETH spot volatility on this move relative to BTC.  Also worth noting that risk reversals are favouring calls right across the BTC curve, and out to Feb on ETH, so for natural longs, this could be a good opportunity to hedge with riskies, or for bulls, calls spreads should look good.

Looking ahead

There is a raft of macro event risk on Wednesday this week, with BoJ, UK CPI, EU HICP (inflation data), US retail sales, and the Fed’s Beige Book report.  

However, one has to say that with crypto very much doing its own thing right now, the market will be focussed on technicals and momentum.  BTC has broken back into the $18.2/$25.2k range which held us from mid June to mid-November, and the Nov highs at $21.5k coincide with the midpoint of this range, meaning that area around $21.5/$21.7k should act as a pivot.  Either way, the market will probably have to chase, as order books remain thin, traders remain short gamma, and conviction remains low.  Keep position sizes small and strap in for a little more volatility.

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All data sourced from our real time systems supporting global 24/7 crypto liquidity provision

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