Research

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Fasanara  Digital

November Commentary

  

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Figure 1: Premiums on BTC Perpetual Swaps contracts on the main derivative trading venues. High positive premiums indicate high demand for leverage long position from traders, negative rates vice versa. Demand for spot has ignited the rally in November, with derivative markets hosting the buy-the-dip army that helped maintaining price above $18000 (22nd 23rd Nov) before the run up to ATH.

Source: TradingView

Commentary

As expected, and discussed last month, November has remained extremely bullish for Bitcoin, with Ether initially underperforming before appreciating considerably and eventually catching up during a spectacular run above $600 (see Figure 2). During the first leg of the move, as BTC surpassed $15K, rates turned decisively positive, only to cool down again as BTC continued its path upwards. Derivative markets also provided buying power during the run up to $20,000 and in particular bought[ all sizable corrections prior to November 23rd, when rates started to cool down towards zero as the market corrected 15%-20% on November 26th. The comeback has been sudden, with rates quicky jumping up on November 30th as BTC tested the all-time high (ATH) for the second time as we write this commentary.

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Figure 2: Bitcoin (in orange – 30h volume MA in purple) and Ether (in blue) MTD price action has been one way only for most of November, only to observe an overdue correction on November 26th. Price action alone could suggest the beginning of a consolidation period, however the macro backdrop and potentially retail FOMO (more on this later), could remain the prevalent force in the market. 

Despite the recent correction, Bitcoin MTD performance stands just above 40%, marking another record-breaking outperformance with the S&P +10%, Gold -5% and Dollar -2% (DXY). The extent to which November has been the expression of institutional investors entering the market, rather than retail FOMO, can be appreciated by looking at Ripple’s token (XRP) performance. XRP is often seen as the perfect retail trap: high market cap, low unit price, high flow of “good news” and institutional partnerships. As people remember getting burned with BTC at $20,000 back in 2017, this time they turned their attention to XRP as BTC approached $18,000, finding the former more than 90% in discount compared to ATH. As these things go, XRP appreciated 200% in few days only to correct 35% or more on November 26th. Other clues of retail participation can be found in the monstrous amounts bought up by PayPal since it enabled crypto purchases on its platform, as well as the gigantic flow of subscriptions into Grayscale Bitcoin Trust (GBTC).

Another interesting dimension of this bull run is the previously anticipated rotation towards Altcoins, for which we repropose a chart that we showed last month (on a different time-scale). In Figure 3 we display the performance of Bitcoin relative to two different baskets of Altcoins. The indices used, ALT and MID, are curtesy of FTX that lists derivatives on them. From the chart it can be seen that from November 1st and, more markedly, from November 18th there has been a strong rotation towards smaller cap coins, as Bitcoin approached ATH.

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Figure 3: Relative performance of Bitcoin vs. two baskets of Altcoins: BTC/ALTPERP (blue-chip, in yellow); BTC/MIDPERP (in purple). As discussed last month (dashed lines indicate the level on the 1st of November), we expected an outperformance of Altcoins, starting with blue-chips and rotating then into MID and eventually small caps. In reality small-caps and Defi have jump-started and performed as well, or better, than some blue-chips. Source: TradingView

Defi has also demonstrated to be a phenomenon that is here to stay, with total value committed to decentralised protocols at approximately 13bn and positive price performance in November, with TokenSet DefiPulse index token (+50%) and FTX DEFIPERP derivative contract (+40%).

The main players in the space are both new and old names: Maker (2.5bn), Compound (1.5bn) and Aave (1.3bn) in the lending market; Uniswap (1.3bn), Curve (0.9bn), Sushiswap (0.6bn) and Balancer (0.3bn) among the DEXes; WBTC (2.2bn), Harvest Finance (0.6bn), Yearn (0.4bn) and RenVM (0.3bn) among the asset managers and Synthetix (0.7bn) alone dominating the derivatives market. The decentralised payment layer remains small, with Flexa (120m), Lightning Network (20m) and xDai (5m) leading the adoption.

DeFi’s main building blocks remain the automatic market makers (AMM) and the lending platforms, which allow swapping one asset for another without using centralised order books. Trading volume on decentralised exchanges kept growing after the initial (marketing) incentives expired (Figure 4), showing interest of the investor community in the underlying revenue stream generated by liquidity provision, as well as the limited slippage and trading fees for liquidity takers.

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Figure 4: More than 95% of DEXes volumes is executed by Uniswap, Curve, Sushiswap, Balancer and 0x, all AMM except for 0x that uses a different approach based on order books Source: Dune Analytics

Media attention towards crypto keeps increasing, especially following the endorsements and/or market participation of investors and firms of the likes of Paul Tudor Jones,  Stanley Druckenmiller, Bill Miller, Square, MicroStrategy, Stone Ridge, SkyBridge, Morgan Creek, Guggenheim Partners, Rothschild Investment Corp. The hard data from the CME traders report however (Figure 5) shows a flattening in the growth of accounts holding more than 5 contracts (25 BTC) in November. In contrast, the AUM of the GBTC trust has grown 50% from $6bn to $9bn (only half of which can be attributable to price increase) during the same period. This data suggests a longer term – strategic allocation to Bitcoin, rather than speculative activity. The GBTC trust, as well as other ETP and ETN products currently offered worldwide, provide a way to own Bitcoin in an institutionally-friendly and centrally-cleared way, that is suitable to long term investors.

 

The picture on crypto native trading venues appears somewhat different, reflecting the different demographics that trades on these exchanges. Data from ViewBase shows a net outflow of USD stablecoins from main exchanges in excess of $800mn during the last 30 days, while the same figure for Bitcoin is $1.2bn. The Bitcoin outflow could have easily ended up in GBTC wallets, but the stablecoins outflow does not represent a bullish signal as those are needed for new money to enter the crypto environment.

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Figure 5: YTD time series of large open interest CME accounts (>25 BTC, reported every Tuesday[AB1] ). Despite the narratives of increasing institutional adoption, throughout November there has been slow growth in the number of accounts classified as large, compared to October that saw a jump from 70 to 100 accounts.Source: The Block

Demand for leverage long positions on derivative markets has eventually caught up with spot, with funding rates (Figure 1) and short term futures basis (the front contract has 1 month left until maturity)  picking up when Bitcoin surpassed $18,000 and spiking on the last leg of the rally. The shape of the yield curve, however, has remained almost unchanged throughout the month, as shown by the chart in Figure 6, and has not steepened, month-on-month, as a result of the bullish price action.

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Figure 6: Back-Front Yield curve steepness over the last two months On Binance (orange), Huobi (blue) and FTX (green). During November, the curve has on average remained unchanged or slightly flattened, despite the strong price performance of the underlying. Source: TradingView

On the option market we observed a drastic reduction in open interest, displayed in Figure 7, caused by the correction on November 26th, indicating a reduced need for protection from market participants despite price has now retraced to its ATH.

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Figure 7: OTM Put Open Interest by number of contracts drastically reduced after price correction showing a reduced demand for insurance from market participants Source: ViewBase

Implied volatility (IV) has also dropped considerably, but, contrary to the recent trend of positive correlation between price and volatility, it has not recovered, and it is currently priced around 65%. Skew, on the other hand, has quickly readjusted and the demand for call options has pushed prices back to a 10% IV premium over puts, demonstrating the bullish sentiment of the market. Figure 8 shows the hourly time series of IV, and of the call-put skew for options with delta between 0.2 and 0.3, in absolute value.

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Figure 8: Historical ATM implied volatility and skew for the month of November. Volatility peaked at 85% on the 24th, and after the correction on November 26th, it has now stabilised around 65%. The price-drop heavily affected the call-put skew which has however corrected quickly with calls more expensive than puts.Source: Genesis Volatility

This month Bitcoin has proven once again that it can capture the interest of the investment community worldwide and provide an alternative to more traditional portfolio allocations. The consensus seems to be that the institutional money entering the market is an inexorable force pushing the price up, and only a fool would not be fully allocated to Bitcoin. Derivative markets show bullish sentiment, and price is trading just short of ATH. In the last two months, one out of four days had price moves greater than 2%. This figure stands in stark contrast with the previous 4 bull runs (then followed by a sharp decline) since Bitcoin inception, when 2% daily moves accounted for more than half of the trading activity. Despite the current landscape, a considerable correction can still take place, being triggered by any of the unknown unknowns, or as a manifestation of the still unmatched influence of whales on the market.