Key Takeaways
• Poor CPI data was released with BTC at recent highs near $22,800

• BTC and ETH dropped $2,000 (8.8%) and $190 (10.8%) in the next 12 hours

• Post-Merge, ETH dropped through $1,550 support level and gathered pace to downside

• ETH basis tightened to flat immediately, but term futures still don't fully price staking

• ETH vol curve dropped 10 vols post-Merge, to a normal 20 vol premium to BTC

• Despite gamma buying, mid-curve vols have failed to rally with spot weakness

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Looking back

Crypto continued to trade strongly into Tuesday's US CPI data, which was released with BTC right at recent highs near $22,800, and ETH near $1,760. After some surprisingly poor CPI numbers, crypto fell violently, with BTC and ETH reaching daily lows, down $2,000 (8.8%) and $190 (10.8%) respectively

The market then turned its focus to the Merge on Thursday, and price held fairly steady until then, but shortly after the event, ETH dropped sharply through the $1,550 support level, and has traded weakly since, with the cross selling down from BTC0.078 to BTC0.070. The low prints so far have been today at $18,360 and $1,280. The market appears to have been holding too much length, expecting weaker CPI data, and perhaps due to Merge hype.

We saw particularly strong sell flows in EOS, followed to a lesser extent by LNK, CMP, and XRP. There were somewhat strong buy flows in ADA and DOG. By client category, we saw heavy selling from funds, OTC brokers, and crypto exchanges; by geographical region, we saw a slight bias towards selling out of APAC and balanced trading elsewhere.

ETH basis reverted towards flat immediately post-Merge as expected, with the final market-implied new POW tokens value coming in at c.115bps. Interestingly, the back-end of the futures curve is yet to price staking value, which is expected to be elevated in the next few months before stabilising around 4-6% long term. Perhaps this a mis-price, or perhaps an efficiently priced liquidity premium pre-Shanghai upgrade next year which will unlock gradual unstaking.

Despite the existence of put skew in the major crypto surfaces, implied vols failed to rally on the first move lower after the CPI data, displaying a notable underperformance of the risk reversals. After the Merge, ETH vols came quickly back to more normal levels, with the middle of the curve (Oct-Dec) dropping 10 vols from 100% to 90%, around 20 vols above the BTC curve. As spot then continued lower, mid-curve vols remained unchanged around 90%, despite the fact that risk reversals remain quite well bid for puts.

Looking ahead

Wth the main crypto event behind us, one suspects that we are all macro traders for the rest of the week, and will be looking primarily to the Fed tomorrow for guidance on how aggressively they intend to raise rates into year end. Given the speed of the sell-off so far, it would be fair to expect some volatility both ways from here.

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

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