Research

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Fasanara  Digital

October Commentary

  

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Figure 1: Event driven price action in October, with a noticeable number of news items having a direct impact on price. Among the negatives, a number of regulatory and legal actions against derivative exchanges, while among the positives we see increasing Bitcoin adoption among traditional companies as a treasury management tool, and easier access to the market for hundreds of millions of retail customers with PayPal allowing crypto transactions from next year. Source: TradingView

Commentary

At the beginning of October, with the CFTC pressing charges against BitMEX and the FCA banning the sale of crypto derivatives to retail investors, few would have imagined performance in excess of 25% for Bitcoin by the end of the month.

Looking at the profile of the trading volume moving average, in Figure 1, we can identify 5 main moments of activity, in chronological order:

  1. the announcement that the CFTC charged BitMEX with illegally operating an unregistered trading platform and lack of KYC and AML procedures

  2. the announcement that Square (NYSE: SQ) invested 50m in Bitcoin

  3. the suspension of withdrawals on OKEx resulting from one key-holder being “out-of-touch” due to his cooperation with a public security bureau (still undergoing)

  4. the announcement that PayPal will soon support crypto purchases and transactions

  5. the leaked news that the biggest south-eastern Asian bank is working to open a fiat-to-crypto exchange.

The positive news produced a much greater effect on price than the negative ones, establishing October as a very strong month for Bitcoin which now trades at early 2018 prices.

Other currencies have somewhat lagged, with the vast majority in negative territory when quoted against Bitcoin. Ethereum kept pace throughout the month, trading shortly above 400, but then failing to hold the support during the equity sell-off on October 26th.

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Figure 2: Relative Value trades among Bitcoin and four of the most representative FTX index products: ALTPERP tracks the most well-capitalised currencies ex-BTC (ETH, EOS, XRP, BCH, BSV, LTC, BNB), MIDPERP tracks more than 20 mid-cap coins (ALGO, CRO, DASH, NEO, XTZ, COMP, UNI, MKR, …), SHITPERP tracks 50 low-cap currencies, DEFIPERP tracks more than 25 DeFi coins.

Source: TradingView

October, on the same trend of September, has been a month of rehabilitation after the excesses of the Summer, with larger coins, on average, outperforming smaller and/or more exotic ones, as displayed in Figure 2. Contrary to last month, however, the trend has been positive for the big names (BTC and ALTPERP index), while remaining negative for the rest of the market. If Bitcoin strength is confirmed during the coming weeks/months, we should expect relative performance to improve for smaller coins, which start to look cheap for historical standards (see Figure 3).

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Figure 3: Focus on the one-year performance of Bitcoin vs ALTPERP and MIDPERP. In both cases we reached a rejection/breakout level, which could indicate a cyclical comeback of the “Alt-season” in the coming months.Source: TradingView

Derivative markets overall confirm the picture drawn by the spot market. Futures increased only mildly, considering the price action, just enough to balance the theta on the basis, and leave the absolute premium for Bitcoin December maturity in the range 1.2%-2%. ETH derivatives, confirming the risk-off attitude and appetite for quality, have traded lower, between 0.5%-1.6%.

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Figure 4: Comparison of the 3-month rolling basis for Bitcoin Futures on FTX and BitMex. It is interesting to note how the future curve has remained below the levels seen in August, despite the price reaching higher. Moreover, it can be observed how BitMex contracts have lost most of their future value, trading close to zero premium. We expect this to remain the case until more regulatory/legal clarity is provided.Source: Skew.com

As shown in Figure 4, such levels (peaking at 12% APR) are to be considered high for historical standards (we touched 20% APR in February and 15% APR in August), but have proven to be short-lived. For the most part, Futures have struggled to maintain rates above 10%, a behaviour confirmed in the respective ranges by funding rates on perpetual markets.

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Figure 5: Weekly Moving Average of the variable borrowing rate on the p2p DeFi platform Aave for USDC overcollateralized loans. Rates have remained low throughout September and October, only to rally towards month-end.

Option prices, on the other hand, have shown a bullish trend throughout the month (see Figure 6) with OTM call options being increasingly more expensive compared to similar OTM put options, until Bitcoin rallied to $13,000 on October 21st, after which the trend halted and instead now signal the start of a reversal towards more neutral territory.

On-chain data also look bullish, in particular the recurring theme this year has been the increasing institutional adoption of Bitcoin as a treasury management tool, which can be evaluated through the count of addresses with balance above 1,000 BTC, for example. This metric recently reached an all-time high of 2231 after having increased approximately 5% in October. But perhaps nothing speaks more than the graph in Figure 7, which shows the open interest of Bitcoin futures on 3 representative exchanges: Huobi, BitMEX and the CME. The latter has seen a threefold growth since the beginning of the year while its unregulated counterparties have seen their open interest declining, or mildly increasing, over the same period.

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Figure 6: The short-term, 1-month, skew has moved from positive to negative during October, signalling an increasing interest in upside optionality, and more in line with the longer term (2-month and 3-month) skew measurements.  Source: Skew.com

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Figure 7: Open Interest on three representative venues: Huobi, BitMex and CME. The first has seen a small increase YTD but overall quite volatile; the second has lost its dominance due to the severe mispricing during March 12th; the third showcases the increasing interest of institutional investors to include Bitcoin in their portfolio, with a relatively stable growth throughout the year CME now rival. Source: skew

The number of Bitcoin held on exchanges has reached a two-year low below 2.5m BTC, as shown in Figure 8, a drop from 16% to 13% of the circulating supply since March. This behaviour is usually associated with investors holding their Bitcoin in a custody solution, rather than on exchanges, where they are usually being kept for sale. Evaluating this in USD terms, there are approximately $33bn on exchanges, an amount in line with the August balance, when Bitcoin price was 15% lower.

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Figure 8: Number of Bitcoin held in centralised exchanges has shrunk by approximately 15% since March Source: glassnode

With 62 days left until 2021, Bitcoin still has plenty of room left for surprise. The last time BTC traded at this price it took 2 days to reach $20,000. The market today is very different from however from late 2017, and it is unlikely that we will see those levels of volatility again. Ether and other altcoins are expected to outperform Bitcoin in the coming months, and with it we expect a considerable increase in the level of leverage in the system and a substantial increase in rates. In the short term we look at the upcoming US Presidential Election as a cause of stress in the system that could cause severe deviations from the endogenous price discovery dynamics, but we are optimistic regarding the sustainability of current, and higher prices.