Flow Analysis

Crypto markets have faced headwinds over the past week, with a generalised sell-off early Tuesday morning taking BTC back below the $63k support to a low around $56k, and creating an impression that the move to a fresh ATH may turn out to have been a medium-term top. As if to give further credence to this story, exchange futures bases all fell significantly, and in the OTC world we saw large unwinds of stablecoin borrows and a consequent move to lower stablecoin lend/borrow rates, signalling less demand for leverage throughout the crypto ecosystem. ETH also broke its medium-term trend, in place since late September, and broke down through 4,550; though it should be noted that ETH has outperformed since, and we are observing healthier signals for ETH relative to BTC, as detailed below.

Flows analysis this week shows that banks and family offices have turned into better sellers, while crypto exchanges (retail) have been biased 73.9% to buying. Regionally, the Americas have been sellers, and EMEA and Asia have remained buyers. By coin, we see a similar pattern to recent weeks in the majors, with a heavier bias to buy ETH (55.4%) than BTC (51.9%). Elsewhere, our clients have been better buyers of XRP, ADA, BCH, LNK, XLM, and EOS, and better sellers of DOG.

As mentioned above, futures markets sent a strong signal this week. Volumes remained fairly average and open interest dropped a little (BTC from $25bn to $23bn and ETH from $12bn to $11bn), but the standout feature was the drop in annualised basis, and associated drop in USD / stablecoin funding rates. For example, from Monday to Thursday, Deribit Dec BTC futures basis dropped from 12% to 9% and the equivalent measure on Okex dropped from 16% to 8% at the low, though both have partially recovered since. Last, but by no means least, BTC perpetual futures bases have mostly turned negative now, for the first time since late September, when BTC was trading in the low $40ks.

Options markets continue to provide insight. BTC implied vols continue to struggle with low realised vol and the failure to break up in price, allowing market makers who are short strikes between $70-100k to continue collecting time decay in relative comfort. ETH is altogether more interesting: despite the same issue as BTC with a large risk premium, the market just feels more committed in ETH. We saw more topside being taken out of the market early last week, as price dipped towards $4,000: this time, notable strikes were Dec 5,000 and 6,500 calls in 12k and 10k lots respectively. We also note that open interest on Mar 15k calls continues to climb, now around 75k contracts outstanding, and the strike itself is currently trading 138 vols (up from recent lows in the high 120s). With positions this large, there is a fair chance that market makers hedging short vega and gamma positions could drive a sudden acceleration in ETH on any move through $5,000.

There are definitely signals that some crypto players are preparing for a period of consolidation, yet others are clearly still very committed to further gains, and as such, this moment does feel like a bit of a crossroads. Leverage in the market is considerably reduced, so positions are probably quite clean, and with implied vols still rather elevated relative to actual volatility, one has to think that length is somewhat hedged / protected. Have a great week!

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Since it was founded in 2015, B2C2 built its technology, products and services to meet the evolving needs of diverse institutions.  Continuously innovative, B2C2 is trusted by clients to find solutions to industry challenges, such as creating the first crypto ISDA Master Agreement in 2018.

Acquired by Japanese financial group SBI in 2020, B2C2 remains a standalone company, headquartered in the UK, with offices in the US and Japan.  B2C2 OTC Ltd. is authorised and regulated by the UK’s Financial Conduct Authority (FRN 810834).  For more information, please visit https://www.b2c2.com

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