Fasanara  Digital

January Commentary  


Figure 1: 24 Hours MA of Rolling Weekly Returns for the main sectors in the crypto universe. It can be noticed how the market was initially driven by the appreciation of Bitcoin (Store of Value index), followed by another socalled Alt-season, which saw the best performance in the DeFi and Smart Contracts sectors. After the correction on January 21st , DeFi has been leading the rebound, with Bitcoin and Privacy Coins being the laggers. Source: TradingView


2021 has just started, and the prospects of a crypto-themed year ahead of us are very strong. Starting just above a $750Bn Market Cap on January 1st, it took a week to cross over the $1 Trillion mark, long sought by the enthusiast crypto community. Some comments from the newly appointed Treasury Secretary Janet Yellen quickly sent the size of the market back to 12 digits territory, after her suggestion that Bitcoin should be curtailed as it is mostly used for illegal financing. A clarification on her stance came quickly, and although DeFi, Smart Contract Platforms and Web3 have returned more than 30% since (100% in the case of DeFi), Bitcoin is still 15% away from the ATH of $41,500 reached on January 8th .


January has offered a clear example of what is often referred to as “Alt Season”, the so-called market regimes when capital and interest shifts away from Bitcoin and into something else. The chart of rolling weekly returns presented in Figure 1 offers an original visual that shows how Bitcoin, strongest performer towards the end of 2020, gives way to DeFi, Smart Contract Platforms and Web3 names (and almost anything else). A notable performer in recent weeks is the Web3 sector, that includes all the non-financial decentralised application (file storage, social networks, art, collectibles) that are, slowly but surely, popping up and affirming their market position every day.


It should be noted that these days when talking about underperformance in Bitcoin, we still refer to an asset that has consistently returned between 10% and 20% per week during the first half of January and is still up 15% on the month. When looking under the hood, in fact, we find a market in great turmoil, with non-linear products that reached unthinkable extremes (more on this later) and linear ones characterised by high volatility and high implied rates.


Figure 2: Bitcoin March Future Basis on Huobi (light blue), Binance (orange), FTX (green) and BitMEX (red). High volatility has characterised the month with the premium on spot reaching just south of 6%, only to then move considerably lower, bottoming just above 1% on the 28th . Source: Tradingview

Futures have started the year with a decisive rally of almost 3% in Basis for March maturity, as shown in Figure 2, pushing implied rates north of 20% APR. The coming weeks have seen increased volatility 3 | P a g e across exchanges leading to a 4% drop during the sell-off on spot markets. In the days approaching and just after the Option expiry on 29/01 we have seen a considerable pick up in rates, with March basis dropping 200 points, to then quickly shot back up (probably because Elon Musk added “bitcoin” to his Twitter bio) and then back down again in similar size. The yield curve, after starting the month in steep Contango, with more than 4% premium between June and March maturity, flattened back to levels seen in December with June-March spread below 2% offering an asymmetrical payoff for a steepening play.


The closest end of the yield curve, defined by the premiums on perpetual swap contracts, has not being spared by the typical volatility, with rates on the more volatile Altcoins turning negative several times during the month. In Figure 3 we show a 24h average of such premiums throughout the month for Bitcoin, Ether and Dot. The last two have shown spectacular volatility in price, justifying perhaps the incredibly high costs for long leverage. Market Capitalisations have doubled (almost, in the case of ETH) over the last 30 days with DOT standing 4th in terms of total market size behind LINK (another DeFi/Web3 token that doubled in price in January), ETH and BTC.


Figure 3: Premium on Perpetual Swaps for Bitcoin, Either and Dot on a variety of trading venues. The premium has remained high throughout the month despite showing high volatility, in particular during the two central weeks of the month. Source: Tradingview

The options market is rapidly increasing in importance, arguably with more and more sophisticated players entering the market and deploying well-proven volatility strategies. January 29th saw one of the biggest expirations on record with a total of $4Bn in Open Interest coming to maturity. However, due to the astronomical rise in price during the past months, and the subsequent halting of such trend, more than 70% of the contracts were already doomed to expire worthless.


By reflexive arguments, we expect the market to take more and more notice of the volatility structure implied by option prices, and trade accordingly. As a further sign of increasing institutionalisation of the market, we notice an exponential increase in block options traded on Deribit through popular services like Paradigm, that allow custom multi-leg strategies to be negotiated OTC and settled on exchange.


Figure 5: Focus on the Put-Call price skew with an historical view for the month of January in the top panel, and the current term structure in the bottom panel. It can be observed how the increasing upside risk brought Call prices much higher than Puts, culminating with the second failed attempt to move above $40K resistance on January 15th . The current structure implies some short-term demand for protection, but an overall long-term bullishness typical of the Bitcoin market. Source:

With the recent events surrounding the brick-and-mortar videogame company GameStop that have seen the retailer’s stock undergoing a massive gamma squeeze orchestrated by members of the now notorious WallStreetBets Reddit forum, retail attention to Option markets is poised to increase in Crypto too.


Implied Volatility throughout the month has been record-high while showing a strong backwardation, making Calendar Spreads a favourite among more sophisticated players. The flattening over the last few days has proven such strategy to be already profitable.


Looking at the Term Structure more in detail, we have seen huge swings in the short-term skew between Call and Put options throughout the month. As shown in Figure 5, as Bitcoin approached the $40K resistance, after having failed to sustain the ATH of $42K earlier in the month, market makers signalled upside risk by raising the Call prices sharply. Since then, market demand for downside protection has rebalanced the market towards a more neutral balance. In particular, as shown in the bottom panel of Figure 5, short term Puts are trading at a premium to Calls, while for longer dated options the skew of the volatility term structure remains bullish.


Figure 6: Weekly moving average of spot exchange volumes show an incredible increase in activity in the last few months, topping in January above $45Bn per day and more than $200Bn during that same week, in aggregate. Source: TheBlock

Looking back at the spot market, we observe clear signs of a cooling down in the aggressive buying that has characterised the end of December/beginning of January period. After having topped above $45Bn per day during the hottest days, the 7 days moving average has now retraced below $25Bn, as shown in Figure 6. By comparison 12 months ago worldwide trading volume was ticking below $5Bn per day. Today Decentralised venues alone are facilitating approximately $2Bn daily, up 150% from last month. Token holders in some of these protocols are entitled to part of the fees charged by the Decentralised Exchanges, and today they have a “stake” in businessesthat collectively are worth more than the 50 years old Nasdaq, as shown in Figure 7 (NDAQ approximately $23.5 Bn). In aggregate, these projects have generated more than £100m in revenues in the last 30 days. It should be noted, however, that most revenues are redirected towards liquidity providers, which in aggregate are currently deploying $9Bn of capital to provide market making on these venues. Incidentally, Coinbase announced it will go public soon, and its shares are trading in private markets at a valuation of $70Bn. More than all the US traditional stock exchanges counted together.


Figure 7: Market Capitalisation Daily Average of the tokens associated with the main Decentralised Exchanges. As volumes have increase manyfold during the last months, governance tokens prices have followed suit. Source: TokenInsight

The case for Decentralised Applications, and consequently for Ethereum, Polkadot, and the other best performers in 2021 so far, becomes more compelling every day. Institutions are looking at the space, and retails too, with Google searches for Ethereum (Figure 8) topping the mania-levels registered this time 3 years ago. Back then it was the CryptoKitties and the Crypto Punks, this time is NBA TopShot (don’t be fooled by the different name, same guys of the kitties) and the Crypto Punks (This is history, and it is not going away). Not everyone is buying it, and Lyn Alden has given us all a cold shower with her Economic Analysis of Ethereum, where the experimental – Concorde like, to borrow her words, nature of the project, makes it a risky Venture-like investment proposition.


Figure 8: Volume of Google Searches for Ethereum has topped the previous 2017 high. Figures for Bitcoin still lag (relatively to 2017 peak), as the DeFi scene heats up for the second act after the Summer prelude. Source: TheBlock