Key Takeaways

• Majors remain range bound as the market searches for reliable information on troubled firms; alts have given back the majority of last week’s outperformance

• Unusually this week, we have seen a strong bias to buy both majors, with buy/sell ratio for BTC at 55.7% and ETH at 55.0%.

• APAC clients were by far our strongest buyers over the past week; by client category, crypto exchanges turned sellers this week, while banks and funds remained strong buyers

• ETH die-hards await a successful Sepolia test-net merge on Wednesday

•Merge theme driving the options market with ETH call buyers pushing ETH vol to a 25 point premium to BTC; ETH riskies moving in favour of calls, while BTC riskies moved in favour of puts.

• Macro traders will watch NFPs on Friday ahead of next week’s CPI data.

Looking back

Crypto -specific themes remain unchanged: range-bound trading in low volumes, as major players focus on minimising credit risk and securing long-term survival.  There is still far too much uncertainty over who owes what to whom, and until the picture becomes clearer, it is unlikely that any large-scale positioning would cause the majors to move significantly one way or the other.  While this state of uncertainty makes short-term price predictions harder than usual, traders are of course hunting for clues everywhere.

On a positive note, FTX founder Sam Bankman-Fried has been actively seeking out investments in crypto infrastructure.  He must believe that we are close to the bottom of the cycle, and that crypto has a long-term future which will require a robust infrastructure.

On a slightly less positive note, officials at major global central banks continue to talk up their own credibility in the face of diminishing confidence in their ability to carry through their promises without crash-landing their respective economies.  The Fed is being challenged by persistent inflation to raise rates to the 3.5-4.0% range by year-end; the ECB is being challenged to raise rates without rupturing peripheral eurozone bond markets once again (note Italy paid almost 3.5% on 10yr money last week), and the BoJ is being challenged to raise inflation to 2% by continuing to print yen to maintain 10yr rates at below 0.25%, bringing the yen firmly back to the centre of global economic imbalances.  Even for an optimist, it seems hard to ignore the economic - and subsequent political - risks which are building in the global financial system.

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Our flow data this week shows that our clients have been mainly buyers this week, especially so in APAC. By client type, our main buyers have again been banks and funds, with crypto exchanges being the only sector that was a net seller. Broken out by coin, we have seen a strong bias to buy both majors, with buy/sell ratio for BTC at 55.7% and ETH at 55.0%.  We also had strong buying in LINK, DOT, EOS, XLM and BNB, and strong selling in XRP, AVAX and UNI.

Futures basis remains largely unchanged, with 1m BTC basis still around +1% on most major exchanges.  The OTC lend/borrow market remains very quiet, with interest predominantly in borrowing alts, where inventory levels are tight due to hoarding of liquidity and credit concerns, meaning synthetic borrows through perps remain generally extremely expensive.

Options markets are fascinating right now, as they generally are in a crisis.  Back end vol is being bought, as players are looking to accumulate longer term protection.  Accordingly, implied vol remains at a premium to realised vol, and the back end is building a vol premium to the front. Interestingly, the back end buying in ETH has been mostly for calls, as market participants remain committed to having long risk on for the Merge play.  Consequently, back end ETH riskies continue to drift lower, with Sept 25 del r/r down 3.5 vols this week to 13.5 vols (puts).  This contrasts with BTC riskies, where Sept 25 del r/r is up 2 vols to 13 vols (puts).  It is also worth noting that ETH vol has risen to a recent high premium to BTC vol, with Sept ATM vol at 104%, around 26 vols over Sept BTC ATM vol at 78%.   In this kind of environment, holding options in a delta hedged portfolio has a clearly negative expected return; expect these curves to move further into contango as players look to maximise term insurance, but at the same time minimise theta bills.

Looking ahead

This week we have US non-farm payrolls, but jobs data currently plays second fiddle to inflation data.  Economists are expecting 250k new jobs, down significantly from May’s 390k, but in all likelihood one NFP datapoint is not going to change the Fed’s way of thinking on interest rates.  Therefore, from a macro perspective, this is likely to be a quiet week, as traders gear up for next week's all important US CPI print.

In crypto land, all eyes continue to watch for more information on troubled firms’ unpaid debts.  We are expecting the Sepolia testnet merge mid-week which, if successful, could generate more excitement around the ETH Merge finally becoming reality in Q3.  

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About B2C2

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