Research Disclaimer
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Executive Summary
- Risk assets mostly continued to rise during the past 1-month, with the exception of crypto, which corrected sharply amid the FTX collapse and contagion. BTC and ETH were down -21.34% and -26.46%, respectively.
- A tailwind for risk assets could be in the works in time for Christmas. Some market observers interpreted Jerome Powell’s recent comments as hinting at the Fed raising rates at a slower pace, in view of somewhat weaker inflation and increased economic risks (e.g. inverted yield curve spread, typically seen as a leading indicator of recession, continues to grow). Next rates decision is on 14 Dec and also U.S. inflation print on 13 Dec.
- However, the challenge for crypto is whether it can shake off the negative sentiment in the wake of the FTX collapse and fallout. Crypto correlation with equities has gone negative, marking a departure from the lockstep movement that has persisted for most of this year.
- ETH’s 1-month correlations with other risk assets also took a dive into significant negative territory.
- November saw a rollercoaster surge and drop in BTC options implied volatilities (vols), reflecting heightened uncertainty amid the FTX event and subsequent contagion. Vols reached a peak of 140%, surpassing that of May’s when the Terra stablecoin collapse occurred.
- BTC options skews (puts minus calls) also surged to new highs in November, implying intensified bidding for put protection and/or outright downside directional bets, although they have come down in the past 2 weeks.
- BTC perpetual futures funding rates were predominantly in and fell to record negative territory in November, implying tilt towards short positioning.
- Market-Neutral Pair Trader hunts for strongly correlated tokens. Such pairs with price ratios that deviate from historical averages can be considered as candidates for a market-neutral pair trade (i.e., long the underperforming token and short the outperforming token, with equal dollar value positions in each token to enable market neutrality).
- Price ratio (BTC price divided by ETH price) is currently near the historical average. Ethereum’s Shanghai upgrade (the next major upgrade post Merge) estimated to be in 2H 2023. It will allow for the withdrawal of staked ETH and also include some improvement proposals that could reduce network fees for some key participants.
- Our style-factor screens track momentum, value, growth, and risk for crypto tokens in the Layers 1 & 2, DeFi, GameFi, and NFT categories. Below we highlight our style-factor screen for top crypto tokens by market cap in the Layers 1 & 2 category. Polygon (MATIC) was among the tokens that outperformed Ethereum in the last 1-month and also still shows positive price momentum for the 3-month and 6-month periods.
- Our event driven section shows recent and upcoming catalysts for selected tokens, as well as crypto-related conferences and important macroeconomic events.
Read the full Alpha Navigator report: Alpha Navigator [November 2022]
Authors
Andrew Ho (Senior Research Analyst)
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