Market View
The size and speed of the bitcoin rally on October 16 (following an erroneous CoinTelegraph tweet) created the setup for further bitcoin strength this week, as market participants speculated on the extent to which spot bitcoin ETF approvals have (or more accurately, have not) been fully priced in. To put this into context, bitcoin moved 4.3 standard deviations higher relative to the previous three months, whereas US stocks moved 2.5 to 3.0 standard deviations lower this week. See chart 1.
That massive divergence partly reflects a deteriorating macro trading environment juxtaposed against bitcoin’s positive idiosyncratic story. Nevertheless, we believe ETF speculation was still the catalyst for the latest bitcoin appreciation, after the iShares Bitcoin Trust ETF ticker (IBTC) was spotted on the Depository Trust & Clearing Corp.’s (DTCC) website. Note that not only does appearing on the DTCC website have no bearing on an ETF’s approval, but IBTC had actually been on the DTCC website since August.
While this may have been the trigger, the net short gamma positioning of option market makers likely exacerbated the upside move. That is, leading up to October 22-23, a significant number of gamma sellers parked positions near $32,000 on bitcoin, making it an important technical level. When the BTC/USD price broke above this, market makers were forced to buy bitcoin to remain delta-neutral or risk increasing their exposure, reinforcing the move higher. Still, we think bitcoin’s ability to sustain upside despite some reverting catalysts is supporting investor confidence.
Separately, ETH market makers have been long gamma, which coupled with the market’s focus on spot bitcoin ETFs, has driven the ETH/BTC cross down for its fourth consecutive week to new yearly lows. In fact, ETH/BTC is currently trading below the levels observed in May-June 2022 following massive liquidations from Celsius and Three Arrows Capital. Although technicals suggest this could be the precursor to some mean reversion, the lack of a strong fundamental narrative for Ethereum puts constraints on our conviction.
Meanwhile, liquidity for the entire crypto complex has improved sharply in October alongside the price action, as the daily average trading volume for bitcoin and ether (across spot and derivatives globally) rose to a total $47B compared to $31B last month. A big part of that is bitcoin futures volumes, specifically perpetual swaps but traditional futures as well. In light of the elevated market activity, the premiums that futures traders are paying are the highest since October 2021 (barring a one day spike in July 2023) as the futures basis has climbed. See chart 2. CME bitcoin open interest and volumes have also reached multi-year highs in the past week, and crypto related funds have also reached their fourth consecutive week of inflows.
