Iconic Crypto Espresso – FTX Post-Mortem: Is the cyclical bottom finally in?

FTX Post-Mortem: Is the cyclical bottom finally in?

Key Takeaways
  • Massive dislocations within crypto derivatives markets in consequence of the FTX debacle are indicative of a short-term bottom
  • Fire-Sale valuations and the fact that we might have passed the peak of maximum hawkishness by the Fed after the recent US inflation data, increase the probability of a cyclical bottom in crypto markets

Massive dislocations in derivatives markets

(We have recently covered the events that led to the FTX debacle in more detail here.)

In consequence of the latest debacle surrounding the major crypto exchange FTX and its parent company Alameda Research, crypto markets have sold off significantly. While Bitcoin has lost another -17% since the start of the week, the FTX Token (FTT) has lost -85% so far.

The sell-off was accompanied by heavy dislocations in crypto derivatives markets. More specifically, put-call volume ratios for Bitcoin options on the prime crypto derivatives exchange Deribit spiked, indicating that traders were significantly hedging downside risks via puts. At one point on Tuesday this week, there were 1.6 x more puts traded than calls on Bitcoin.  

This is also supported by the fact that the options skew increased significantly in favor of puts and the fact that implied volatilities in Bitcoin options spiked.

 Iconic Crypto Espresso - FTX Post-Mortem: Is the cyclical bottom finally in?Bitcoin Derivatives Indicators

In addition, funding rates on perpetual futures contracts in Bitcoin went heavily negative as did the 3-month basis rate. Both of these phenomena imply that traders largely preferred short over long contracts. 

The 3-month basis even went negative, signaling that market expectations for the next 3 months became relatively pessimistic. The 3-month basis is the difference between a 3-months futures contract and the current spot price of Bitcoin. Going long spot and shorting the delta-equivalent 3-months futures contract is often referred to as “carry trade” since the futures contract used to trade at heavy premia relative to the spot price. 

This has recently changed in consequence of the recent market dislocations to the extent that traders massively unwound these carry trades. This is also evident in our “Bitcoin Futures & Perpetual Positioning Proxy” that shows a significant decrease in Bitcoin net short positioning on a daily basis. Non-commercial traders are usually net short Bitcoin futures & perpetuals on account of the carry trade.

Iconic Crypto Espresso - FTX Post-Mortem: Is the cyclical bottom finally in?

Apart from the abovementioned dislocations, there was a very low dispersion among Altcoins relative to Bitcoin, signaling that the market was rather trading on systematic factors than on coin-specific factors – something one usually observes near local bottoms.

We have recently combined 15 metrics to an aggregate “Crypto Sentiment Index” that even signals a higher degree of bearishness than during the LUNA crash in June 2022. All in all, these metrics are currently indicative of a short-term bottom. 

Iconic Crypto Espresso - FTX Post-Mortem: Is the cyclical bottom finally in? Bitcoin Price vs Crypto Sentiment Index

The “Crypto Sentiment Index” will also be part of our new weekly report that we are planning to release by the end of November on a regular basis.

In combination with “fire-sale” valuations, we think that there is an increasing probability of a cyclical bottom in Bitcoin and cryptoassets in general.

BTC Composite Valuation Line

The latest below-consensus US inflation data support this case even more from a macro perspective since they imply that we might have passed the peak of “maximum hawkishness” by the Fed. We have covered this investment hypothesis in greater detail in our latest “Crypto Market Intelligence” as well (see here). 

Bottom Line: In general, we think that the risk-reward ratio has improved significantly following the latest events and that this might be an attractive environment for investors to increase their strategic exposure to cryptoassets.

Stay humble and stack Sats,


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