This is a free preview of MTC 28… In this note:
The macro story is about to worsen again so while the downside is firm (BTC 20000 area), the topside is capped (25000).
Flippening ETH vs. BTC options activity suggests market long spot and super OTM calls and not much in between.
Correlations update.
Super mega extremes in the RSI provide useful signals in bitcoin.
Today’s note is 1500 words (7-minute read)
Hodge Podge
Regulation has been the big story of late, but that is getting boring, so let’s talk about something else. Also, a smart reader also pointed out that US regulation is not the supreme variable in the crypto equation given a majority of crypto volumes transact outside the United States. We should not completely obsess over it. Crypto, unlike most other capital markets, is not a US-dominated market. Also, the regulators remain the tortoise in the fable. This could take years.
Today, I cook up a hodge podge of random thoughts and data for your consumption.
Current market view
I have been writing since July 6 or so about a bottoming process in crypto, mostly driven by crypto-specific factors like Merge optimism, the end of forced liquidations, and a flurry of technical bottom signals. Now, the risk is external macro factors come back to cap the topside.
The market has been trying to play a Fed pivot and the narrative was boosted by massively oversold stonks and the recent FOMC meeting where Fed Chair Powell looked pretty chill. The problem is, he accidentally ratified the market narrative of a Fed pivot, something he did not want to do. Now, the Fed is trotting out the talking heads one by one to push back. For example:
*DALY: FED'S WORK ON INFLATION `NOWHERE NEAR ALMOST DONE'
Kashkari Says Fed Still ‘Long Way’ From Backing Off Hikes: NYT
And this Bloomberg editorial by Bill Dudley (ex-NY Fed) which opens with:
Investors have lately become strangely optimistic that the Federal Reserve won’t have to tighten monetary policy much further, bidding up stocks and bonds amid hopes that the Federal Reserve will soon get inflation under control.
This wishful thinking is both unfounded and counterproductive.
I agree with Dudley! Market pricing of Fed cuts in 2023 is premature. The Fed is following lagging indicators like CPI and the US Unemployment Rate and with inflation still going nuts and several components of CPI likely to be sticky (especially rents), it’s way too early to be thinking about Fed cuts. Remember that rent is more than 30% of the CPI figure:
So, with nothing particularly new in cryptoland and macro still kind of supportive, but not for long … I think we continue to bounce around in the 20000/25000 range, supported by crypto factors, but weighed down by macro now that the short squeeze in stocks looks to have run its course. August 10th remains the key date for the ETH merge, though excitement has calmed from extreme levels already as ETH tried and failed to hold above the key 1700 level.
ETH tried to take out the 1700 pivot, but has not held on
My guess is that ETH stays well-supported into the Merge, still, as there is no reason for anyone to panic here and all Merge-motivated ETH longs are still deep in the money.
A flippening of sorts
The flippening is the day ETH market cap exceeds BTC market cap. We’re nowhere near there right now. ETH market cap is currently 44% of BTC:
ETH market cap vs. BTC
There was a flippening of sorts this week, though, as ETH options open interest now exceeds bitcoin options open interest. This gives you a sense of how excited people are about The Merge, and perhaps how they are positioned.
ETH options open interest (OI) surpasses BTC OI for the first time
Interestingly, this seems to be a product of a) nobody cares about bitcoin right now and b) people are buying very low delta topside to get max leverage in ETH. You can see this in the following chart (full explanation after the graphic)…
This has been a free preview of the latest MTC. The rest of the note covers the situation in ETH options, updates you on BTC correlations, and talks about how to use RSI at the mega extremes in BTC.
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Thanks.
bd