Flow Analysis
Crypto majors have notched up another strong week, with ETH breaking above 3650 resistance last Thursday, and BTC breaking 58.5k to reach a high of 62.5k on Friday, as positive ETF news hit the wires. DOT has been the other standout performer, rallying from 35 to 42, with a 45.50 high.
Our flows have been biased to the buy side. Category breakdown suggests the impetus is still coming from institutions, notably banks, OTC desks, and funds, with retail driven platforms biased more to the sell-side. Exchange flows have been notably weak, at a 44.9:55.1 sell/buy ratio. Regional breakdown shows the same theme as last week: Americas driving the buying, while EMEA and more retail driven Asia are more balanced. Our coin breakdown shows how flows have favoured BTC at the expense of ETH, and elsewhere we have seen notably strong buy flow in XRP, DOT, ADA, DOG and BNB, and strong sell bias in XTZ and UNI.
Futures markets have heated up this week, with open interest rising 15% to $23bn across the major exchanges, still not an extreme level, but certainly one to watch. This measure peaked in April around $27/28bn, and it could be argued the market is deeper now, with the additional fresh institutional money that is clearly coming into the market. Basis on perpetuals is moving a little higher over the past few days, signalling some demand for leverage on retail exchanges, which is a change from last week, where we noted weakness on Chinese exchanges. Basis on term futures has remained generally strong during the week, but overall the standout feature is that CME basis has remained stubbornly high, pricing in additional demand from US BTC futures ETFs, and a firm reminder that rolling costs will generate a strong negative headwind on performance of this product, relative to spot. Annualised basis on CME BTC futures is currently at 27pct for October and 16% for November.
In options, open interest continues to move steadily higher, with total open interest on all exchanges now above $13bn (up from $10bn last week and $6bn at the end of September). Friday was a high volume day, and the fresh volume brought a change in tone to the market. Up until Friday, BTC skew showed a clearly defensive tone, however, since spot broke up on Friday, we are seeing much better demand for calls in general. December BTC 25 delta risk reversals traded 2 vols for puts late last week, and are now back at 2 vols for calls.
Market makers remain quite short of December calls, particularly 60k, 64k, 70k, 80k, 100k, and 120k strikes, helping maintain a persistent risk premium (implied minus realised vol) of around 15 vol. Risk premium can be interpreted as the money that market makers expect to make / lose by holding short / long option positions through time and actively hedging. In this instance, market makers are demanding a large risk premium to compensate for the risk of being short the aforementioned strikes, implying an expectation that if we make fresh all-time highs, spot will accelerate, and volatility will change gear.
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