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Welcome to Crypto Long & Short! This week, Greg Magadini, director of derivatives at Amberdata, forecasts the next shifts in the bitcoin market by looking at data for the crypto's derivatives.
Then, Abdulla Kamel, Co-Founder of ARP Digital, says retail dominance of crypto trading has led to imbalance in the structure of the options market. He offers ways to fix this problem and gain more participation from institutions. As always, get the latest crypto news and data from CoinDeskMarkets.com. – Benjamin Schiller, head of opinion and features at CoinDesk |
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BTC Halving: Sell-The-News or Buy-The-Alt-Rotation |
"IBIT is the fastest growing ETF in the history of ETFs," Blackrock (BLK) CEO Larry Fink recently declared in an interview with Fox Business. The SEC approval of spot Bitcoin ETFs in January and subsequent performance has driven BTC and the broader crypto market to new heights. First, Bitcoin itself has made a new "all-time-high," as prices broke past $70,000. U.S. based CME futures contracts for Bitcoin surpassed the open interest of all other exchanges, including Binance, to become the largest BTC derivatives venue. And, finally, the futures basis reached over 25% annualized, nearly five-times the U.S. risk-free rates. Where does that leave us today? Bitcoin has one more major fundamental milestone that's keeping traders and investors excited for higher prices, and that's the Bitcoin halving. Scheduled to occur around April 20 (the perfect meme, of course) the Bitcoin block issuance rate will drop from 6.25 coins per block, to 3.125. Although a small sample size, the past years in which Bitcoin had a halving event, the Jan to Dec performance averaged about 200%. This would imply an end-of-year price for BTC of about $91,500. That said, from a derivatives trading perspective, the predictability and certainty around halving isn't like the uncertainty of an SEC spot ETF decision and the subsequent ETF adoption. That means that traders aren't likely to be surprised by a completely known event. Given this understanding, using Bitcoin derivatives as a contrast to Ethereum tells us a story around the potential opportunity for a post-halving rotation. |
Looking at the April 26 option expiration (top) versus the June 28 expiration (bottom), we can clearly see the dynamics being priced into both Bitcoin and Ethereum options. Firstly, for April 26, Bitcoin options on the call wing are priced at a substantial premium to the Ethereum call wing, while the Ethereum put wing is priced at a premium to the BTC put wing. Longer-dated options for June 28 are nearly identically overlaid, showing a tight relationship between BTC and ETH to be regular in the longer term. What this tells me is that the current halving narrative is being priced into short-term BTC options, while at the same time, the lack of optimism around Ethereum due to a potential "securities" designation from the SEC and likely disapproval for a spot ETF in May are causing traders to bid for Ethereum puts. Something else I'd like to point out is the differential in CME-led positioning between BTC and ETH. |
Looking at the top chart for BTC derivatives positioning we can see that CME futures (in green) really started in earnest in October around the enthusiasm for a spot ETF approval. Today, CME BTC open interest dwarfs any other exchange, including Binance. If we look at Ethereum CME open interest, we see nearly no increases while Binance continues to exceed CME open interest by a large margin. This tells me that the US market has yet to begin building up positions in Ethereum; and should we move towards a spot ETF for Ethereum, whether in May or much later (after initial rejections), buyers haven't crowded Ethereum yet. So why should we even care about this opportunity to buy the laggard Ethereum? While the market is excited about the BTC halving slowing down the issuance rate for coins into circulation, (clearly displayed through 4/26 options) the ETH supply has not only already stopped growing, but since September 2022, is actively decreasing, due to EIP-1559 burns. Ethereum has also just successfully completed the Dencun upgrade, as L2s and L3s begin to facilitate RWA, DeFi and NFT growth, along with the ability to build native "app-chains" for high throughput protocols that want to isolate activity within their own environment. No one knows for sure what the future holds, and investing is peppered with risk. But a general axiom that I like is whether the fundamentals are already priced-in, or is the market under-invested in a potential opportunity? In my mind, after halving, the BTC events will be behind us, and instead of merely "selling the news," we can "rotate into the alts" in this case, specifically Ethereum. |
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The Rise of Crypto Options and Structured Products |
The crypto options space, primarily on the retail side, has had stints of exponential momentum starting from July 2021 until June 2022, followed by a decimation in vault TVL and absolute returns during periods of pronounced realized volatility. The retail consensus from options and structured products vaults, which have employed systematic short volatility strategies is far from good. |
Source:defillama.com/protocols/Options Options and structured products are naturally complex and require at least quasi-active management. While the demand for convexity increases, and 0DTE options rise again in the retail consciousness, institutional providers have been quietly advancing the required infrastructure for the non-retail investor base to get involved. These types of structured products give investors a breadth of crypto payoffs while also solving for degrees of customization. The problem The issue, here and in the development of many other crypto instruments, has always been market microstructure. Crypto began as a grassroots ideological experiment with buy-in from a very niche group of people who wanted to exchange an asset that had no certainty around it. As a result, the market microstructure that was designed to service it was self-serving, unguided, and naturally unregulated. Some of the infrastructural issues that exist today in crypto such as fragmented liquidity, no consensus around centralized pricing mechanisms, and supply/demand disparities from one trading platform to another are legacy challenges that are just now becoming more addressable as crypto begins to transition from a fully retail market. Where we are While there has been a big focus around on-chain structured products, an equally exciting opportunity lies in delivering crypto payoffs to traditional investors. As crypto becomes increasingly relevant in portfolio allocation, we will begin witnessing a strategic allocation capture that is far more material than we have seen in the past. This is made possible by the breadth and quality of institutional grade products and delivery pipes that have been developed including ETFs, ETP, and other non-listed notes. There is already back tested data that supports the view that adding BTC to a balanced portfolio leads to improvements in both gross terms and as measured by both Sharpe and Sortino Ratios. View the below table from Coinshares: |
Further crypto-based products can contribute positively to a balanced portfolio as well. At ARP Digital, our role as a structured product provider is to optimize a broader portfolio with volatility products across the suitable crypto universe. Volatility Products Crypto volatility is a dynamic, rapidly changing space influenced by the polarization of market participants, access to outsized leverage, and market microstructure. The lack of historical adoption has been the result of a reflexive cycle of crypto dealers not having enough demand to prioritize it with their own distribution and bank dealers not having regulatory clarity, or incentives to advance it. As such the historical volatility profile, shown below in a graph by Amberdata, is a very telling depiction of the outcomes of the lack of institutional infrastructure and participation. |
Since traditional delivery pipes for crypto structured products rely on integrations between crypto participants and traditional intermediaries, there have been hurdles that have resulted in important compromises, from capital efficiency to collateral management, which have further deterred investor demand. Conclusion As spot bitcoin ETFs continue to be a massive success, and the broader consciousness recognizes the value of the asset class from an investable and psychological level, the demand for product development will follow. Modeling the trajectory of other asset classes, the crypto structured product sector will have exponential growth. At ARP Digital, we are confident that there will always be a demand for yield-bearing and volatility products. In crypto, the first generation of yield products involved unsecured lending to various market participants to deliver yield, sometimes unknowingly. Following the destabilizing events of 2022, investors are beginning to think deeper about the sources of yield and how to quantify the risk they take for it; there is no such thing as "a free lunch." Structured products offer yields that are deterministic and mathematically verifiable based on market outcomes, which fortunately lead to more peaceful nights. |
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From Benjamin Schiller, here is some news worth reading: |
- HONG KONG NEXT? Following the approval of spot bitcoin ETFs in the U.S. in January, investors have been waiting to see what's next for these mainstream-friendly vehicles. The answer may be Hong Kong, which looks set to approve the first set of applications for spot bitcoin exchange-traded funds (ETF) next week, making it possible that the products could be ready to start trading in April, Reuters reported. Harvest Global Investments, a major asset-management company in China, and asset manager VSFG, together with its partner, Value Partners, have applied to HK regulators for a spot ETF. The Hong Kong units of China Asset Management and Bosera Asset Management make up the four applicants currently in the running. Australia is also likely to see ETFs by mid-year, while Singapore and Dubai, two other big regional trading venues, are showing less urgency. The 10 approved U.S. bitcoin ETFs have amassed more than $50 billion since launching, giving a significant boost to the entire crypto market.
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