YTD: BTC -36.9%, ETH -52.5%, large cap alts -51.5%, mid cap alts -54.8%, stocks -14.5%, bonds -10.2%, gold +2.3%
1) Repeated 5% swings in BTC and ETH with no clear direction show the cost of trading large right now and are a symptom of near-record futures open interest (contracts) in both, but failure to follow through >$32K or <$28K means more frustration, more leverage, more refusal to participate, and more industry introspection.
2) As the calendar moves through previously expected Ethereum merge dates we’re beginning to see the roll down of options in what had been consistently bid months which leaves forward vol in a position where we are constructive on buying July + selling September.
3) Meanwhile performance of the ETH/BTC pair has been poor to say the least as merge progress and valuation come under question. That is, if Ethereum is the new web then some may be realizing most internet stocks are trading at pre-COVID highs.
We think an extended period of time spent trading above $2000 or a surprise pull-forward on the merge is needed to restore sentiment and open the door for any sustained outperformance.
4) More generally, our desk takes the view that the recent weakened link between crypto and equity performance is transitory and because of that the current gap makes tactical longs on BTC attractive via risk reversals (1m skew @ 89th percentile 1y lookback) or GBTC (-30% prem).
5) The story in the broader markets continues to be one of fast money vs. slow money with hedge fund/CTA exposures at levels not seen since March 2020 but households (largest holder of U.S. equities) still essentially all-in. From last month:
“For every $100 deployed into the stock market over 74 weeks only $2 have been redeemed thus far.”
Goldman Sachs Investment Research
And so we anticipate a moderate rally in the near-term but do not necessarily have a positive outlook on crypto and equity returns in the coming quarters, i.e. if you believe the music stopped then there is still room for correction to historical medians (or lower) for valuations and positioning; albeit we expect to continue seeing new opportunities in systematic and market neutral trading arise regularly…
