Research Summary
The report discusses the recent pullback in major cryptocurrencies, attributing it to a combination of liquidations in futures and perps markets and the skewing of short-term volatility towards puts. It also highlights the role of ETF sentiment in driving the rally, while noting the correlation with equities and gold. The report further points out that despite the pullback, downside protection remains in demand and volatility expectations remain high.
Key Takeaways
Spot Price Pullback
- Retracement of Spot Prices: The report notes that spot prices for major cryptocurrencies retraced to $40K and $2.2K levels, following a months-long rally. This rally has been largely attributed to bullish ETF sentiment, but the report suggests that other factors, such as the correlation with gold and equities, have also played a role.
Short Term Shorts Validated
- Validation of Bearish Positioning: The report validates the shift towards bearish positioning highlighted in the previous week’s commentary. Despite the retrace in spot, positioning remains heavily tilted towards puts in the short term, indicating a lingering preference for protection against further downside.
Options Markets Remain Resolute
- Resilience of Volatility Markets: Despite the pullback, the report notes that positioning in volatility markets has remained largely unchanged. ETH markets still demand a higher premium over the level of delivered volatility than BTC’s, and both retain the kinks that are anchored to the end-of-January expiry.
ETF Narrative and Other Factors
- Overemphasis on ETF Sentiment: The report suggests that the ETF narrative may have obscured other factors that have contributed to the rally in cryptocurrencies. It points out that the rally has occurred alongside a similar rally in equities and gold, and a weakening dollar.
Leveraged Long Positions Normalization
- Normalization of Leveraged Long Positions: The report suggests that the pullback in spot may have allowed the build-up of leveraged long positions to normalize. However, it also notes that downside protection remains in demand and volatility expectations have shown no signs of moderation.
Actionable Insights
- Consider the Broader Market Context: The report suggests that investors should consider factors beyond ETF sentiment when analyzing the cryptocurrency market. This includes correlations with other asset classes such as gold and equities, as well as broader economic factors like the strength of the dollar.
- Monitor Volatility Expectations: Despite the pullback, volatility expectations remain high. Investors should keep a close eye on these expectations as they could signal future market movements.
- Assess Downside Protection: The report notes a lingering preference for protection against further downside, even after the pullback. This suggests that investors should assess their own downside protection strategies in light of current market conditions.
