Market Pulse – Weekly Market Insights Newsletter (30/05/2022)

Speculator net-short exposure in BTC futures at historical high. ETH options implied vols show inverted term structure – risks still top of mind. Directional movement index shows downtrend intact for BTC.

Chart of the Week: Speculators Prefer Shorts

• CME Group Bitcoin futures net position of leveraged traders (light blue line) has reached a historical high in net-short exposure, indicating speculator views are predominantly directional to the downside. If a significant rally in BTC were to occur, an eventful short squeeze could perhaps be on the cards? 
• Leveraged traders are typically hedge funds and various types of money managers, including commodity trading advisors and commodity pool operators. The traders may be engaged in managing and conducting proprietary futures trading, and trading on behalf of speculative clients.

• Asset manager net-long position has been falling recently, however, seemingly late as BTC has drawn down significantly already. This group showed a large increase in net-long position back in October 2021, mainly due to the launches of Bitcoin futures ETFs – in hindsight terrible timing, but served as a useful contrarian indicator, as BTC peaked the very next month in November 2021.
• The asset manager category consists of institutional investors, including pension funds, endowments, insurance companies, mutual funds, and those portfolio/investment managers whose clients are predominantly institutional.
• The dealer category consists of participants typically described as the “sell-side” of the market. These include large banks and dealers in securities, swaps, and other derivatives. The other reportable category consists of traders mostly using markets to hedge business risk, and includes amongst others corporate treasuries.

Fund Flow Tracker

• Aggregated exchange balances of BTC and ETH rebounded during the past week, potentially reflecting renewed selling inclination by investors. In the past week, aggregated exchanges saw net inflows of 21.9K and 110.7K for BTC and ETH respectively.

• BTC balance held on OTC desks dipped during the past week, although the overall trend is up from the March 2022 low, potentially indicating inclination to sell from larger investors as well.

Derivatives Pulse

• Options implied volatilities (vol) for BTC and ETH have settled down after parabolic explosion during the Terra stablecoin collapse, although they remain elevated compared to the lows experienced in April 2022. Also, term structure is inverted, with front-end vols exceeding back-end, indicating near-term risks are still top of mind. 1-week implied vol currently stands at 73.5% and 93.3% for BTC and ETH, respectively.

• The options put-call ratio for BTC remains close to peak levels YTD, although ETH’s is down from its YTD high in April. This is potentially a case of buying protection late, since BTC’s put-call ratio only started rising recently after BTC had already experienced a significant drawdown.

• Although options skews have dropped from the peak levels during the week of the Terra stablecoin event, they remain elevated, indicating that buying put-protection now is still relatively expensive.

• BTC and ETH perpetual futures funding rates are predominantly positive during the past week, potentially signalling continued tilt towards long positioning.

Technically Speaking

• The components of the Directional Movement Index (DMI) – Average Directional Index (ADX), Plus Directional Index (Plus-DI), and Minus Directional Index (Minus-DI) – show that the downtrends for both BTC and ETH are intact. Minus-DI remains above the Plus-DI, indicating that direction of the trend is down, while ADX printing above the 25 level signals that the trend has strength.

Price Movements

News Highlights

• The U.S. Federal Reserve published its 3-4 May Federal Open Market Committee (FOMC) meeting minutes. The minutes cover general macroeconomic conditions and outlook. According to the minutes, the median Desk survey respondents projected rate increases at the two following meetings. FOMC events tend to impact most risk assets including crypto.
• Technology venture capital (VC) firm Andreessen Horowitz (a16z) raises US$4.5B crypto fund to back blockchain and web3 startups against tighter financial economic conditions. According to CNBC, a16z launched its first fund 4 years ago during the ‘crypto winter’. This is the VC’s fourth fund, bringing the total raise to US$7.6B. 
• On crypto adoption, the U.S. Federal Reserve reported 12% of adults in the U.S. held cryptocurrency in 2021 in its Economic Well-Being of U.S. Households in 2021 survey. This is crypto’s first appearance in the survey, suggesting gradual adoption. Similarly, the European Central Bank (ECB) reported that 1 in 10 eurozone households own cryptocurrency.

Catalyst Calendar

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