Bitcoin Bull Run Precedes Ethereum Rally
Days of triple digit volatility and rampant amateur speculation are gone. Unlike the overblown enthusiasm which defined the peak of 2021, investors now are more measured and discerning.
2023 has been defined by (a) discrete and information fuelled rallies followed by unprecedented low volatility, and (b) rise of traditional finance entrants in digital assets.
Bitcoin (BTC) has rallied sharply relative to Ethereum (“ETH”), pushing BTC-ETH ratio to its highest level since 2021. Several factors point to a potential reversal in the ratio. Investors can deploy CME Micro BTC and Micro ETH Futures to harness gains from eventual reversion.
BTC surged 20% during the past week driven by excitement over the anticipated approval of a BTC Spot ETF. Large liquidations triggered as BTC prices rose on its re-emergence as a haven asset as discussed in a previous paper.
BITCOIN IS A HAVEN (AGAIN)
In October, BTC’s correlation with gold rose while correlation with Nasdaq-100 has inverted suggesting that investors consider BTC as a haven rather than a risk-on asset.
The case for BTC as a haven derives from its limited supply. Every four years, the number of BTCs minted as a mining reward, halves and will eventually halt, leading to a fixed supply.
BTC has played its role as a haven previously. In March this year, during the US regional banking crisis, BTC surged 40%. BTC also rallied 20% at the start of Russia-Ukraine conflict but soon pared those gains. Given the repeated pullback in its prices, question around BTC’s ability to deliver as a safe haven remains.
Assigning BTC a haven status could be a tad bit too early. It is a new asset. It faces regulatory ambiguity. It remains under-invested relative to traditional safe havens like gold and treasuries.
Notwithstanding that BTC is new, it is the most popular and widely tested cryptocurrency. Flow of assets from riskier crypto to the safety of BTC during rising uncertainty partly contributes to haven flows into BTC.
SHORT SQUEEZE ACCENTUATED BITCOIN’S RALLY
Recent rally was punctuated by heavy deleveraging in BTC derivatives. During the long squeeze in August, 64,000 BTCs were liquidated. In the following period, only half of these long positions returned.
These positions were not spared either as large liquidations occurred on October 17th and 23rd leading to unwinding of more than 60,000 BTC.
The size of liquidation was like those in Jan 2023 when prices definitively broke above the 20k range, suggesting that this washout may be adequate to cement a major psychological price level.
AWAITING A BTC SPOT ETF
The latest development in the BTC spot ETF saga comes as an appeals court upheld the ruling against SEC’s rejection of Grayscale’s spot ETF application based on concerns that market manipulation is not addressed sufficiently.
The court held that SEC’s decision was arbitrary, capricious, and unenforceable. This time around, the SEC stated it will not be appealing any further.
The SEC’s easing stance is also echoed in the modest feedback response to other spot ETF applications. Many now believe that all spot BTC ETFs will be approved together and probably before the deadline of January 10th.
Approval of spot BTC ETFs is expected to make the asset available to a wider audience in a familiar Tradfi product structure making BTC go “mainstream.”
Spot ETFs will spur greater demand for spot BTC from ETF manufacturers. When gold ETF was first listed, incremental fund flows translated into higher demand for physical gold.
ETF listing and BTC price run is not a given as regulatory concerns remain. Prices have struggled to sustain ETF excitement driven rallies not once but thrice in 2023 due to slow developments compounded by a harsh macro backdrop.
The risk that the current rally will pullback persists. Earlier this week, price action was significantly influenced by investors speculating on the approval of Blackrock spot ETF (IBTC). The rumours have been spurred by the listing, delisting, and relisting of the ticker on Depository Trust and Clearing Corporation (DTCC) website.
BITCOIN BULL RUN PRECEDE ALTCOIN RALLIES
In stark contrast to BTC’s rally, other major cryptocurrencies have lagged pushing BTC dominance to its highest since 2021.
ETH has rallied 15% over the past week. ETH underperformance relative to BTC has pushed the ratio between them to levels unseen since 2021.
Altcoin underperformance is unusual. During past BTC rallies, ETH price tops lagged BTC tops by a month. This is a consequence of capital rotation within crypto.
In past rallies, asset rotation can be seen in three distinct waves starting with (1) increase in BTC capital, (2) ETH rotation, followed by (3) increasing stablecoin flows.
MARKET METRICS AND ON-CHAIN SIGNALS
A raft of market metrics points to bullish sentiment in crypto markets due to resilient Long-Term Holders (LTH), limited profits at current levels, and strained supply which is expected to be exacerbated by demand from spot ETFs.
More importantly, market metrics indicate a higher bullish sentiment for ETH.
FUTURES AND OPTIONS POSITIONING
Leveraged funds have built up net short positioning over the last few weeks in BTC futures. Contrastingly asset managers have setup net long positioning. In options, BTC full size options have a bullish P/C ratio of 0.51 and Micro BTC options have a P/C ratio of 0.76.
In contrast, leveraged funds bullish on ETH have switched from net short to net long positioning last week. Full size ETH options have bullish P/C ratio of 0.38 and Micro ETH options have P/C ratio of 0.38.
Overall, leveraged funds and option markets are more bullish on ETH compared to BTC.
TRADE SETUP
BTC prices may pullback relative to ETH in the short term given price divergence. CME’s suite of crypto futures can be deployed to harness gains from this trend reversal.
The hypothetical spread posited in this paper consists of two legs: (1) long position in Micro ETH futures expiring on November 24th (METX3) and, (2) short position in Micro BTC futures expiring on the same date (MBTX3).
Each lot of Micro ETH futures provide exposure to 0.1 ETH while each lot of Micro BTC futures provides exposure to 0.1 BTC. To balance notional values, nineteen lots of METX3 are required for each lot of MBTX3 at current prices
● Entry: 19.090
● Target: 17.58
● Stop Loss: 20.000
● Profit at Target: USD 276
● Loss at Stop: USD 169
● Reward to Risk: 1.6x
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme/.
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
2023 has been defined by (a) discrete and information fuelled rallies followed by unprecedented low volatility, and (b) rise of traditional finance entrants in digital assets.
Bitcoin (BTC) has rallied sharply relative to Ethereum (“ETH”), pushing BTC-ETH ratio to its highest level since 2021. Several factors point to a potential reversal in the ratio. Investors can deploy CME Micro BTC and Micro ETH Futures to harness gains from eventual reversion.
BTC surged 20% during the past week driven by excitement over the anticipated approval of a BTC Spot ETF. Large liquidations triggered as BTC prices rose on its re-emergence as a haven asset as discussed in a previous paper.
BITCOIN IS A HAVEN (AGAIN)
In October, BTC’s correlation with gold rose while correlation with Nasdaq-100 has inverted suggesting that investors consider BTC as a haven rather than a risk-on asset.
The case for BTC as a haven derives from its limited supply. Every four years, the number of BTCs minted as a mining reward, halves and will eventually halt, leading to a fixed supply.
BTC has played its role as a haven previously. In March this year, during the US regional banking crisis, BTC surged 40%. BTC also rallied 20% at the start of Russia-Ukraine conflict but soon pared those gains. Given the repeated pullback in its prices, question around BTC’s ability to deliver as a safe haven remains.
Assigning BTC a haven status could be a tad bit too early. It is a new asset. It faces regulatory ambiguity. It remains under-invested relative to traditional safe havens like gold and treasuries.
Notwithstanding that BTC is new, it is the most popular and widely tested cryptocurrency. Flow of assets from riskier crypto to the safety of BTC during rising uncertainty partly contributes to haven flows into BTC.
SHORT SQUEEZE ACCENTUATED BITCOIN’S RALLY
Recent rally was punctuated by heavy deleveraging in BTC derivatives. During the long squeeze in August, 64,000 BTCs were liquidated. In the following period, only half of these long positions returned.
These positions were not spared either as large liquidations occurred on October 17th and 23rd leading to unwinding of more than 60,000 BTC.
Source: Glassnode
The size of liquidation was like those in Jan 2023 when prices definitively broke above the 20k range, suggesting that this washout may be adequate to cement a major psychological price level.
AWAITING A BTC SPOT ETF
The latest development in the BTC spot ETF saga comes as an appeals court upheld the ruling against SEC’s rejection of Grayscale’s spot ETF application based on concerns that market manipulation is not addressed sufficiently.
The court held that SEC’s decision was arbitrary, capricious, and unenforceable. This time around, the SEC stated it will not be appealing any further.
The SEC’s easing stance is also echoed in the modest feedback response to other spot ETF applications. Many now believe that all spot BTC ETFs will be approved together and probably before the deadline of January 10th.
Approval of spot BTC ETFs is expected to make the asset available to a wider audience in a familiar Tradfi product structure making BTC go “mainstream.”
Spot ETFs will spur greater demand for spot BTC from ETF manufacturers. When gold ETF was first listed, incremental fund flows translated into higher demand for physical gold.
ETF listing and BTC price run is not a given as regulatory concerns remain. Prices have struggled to sustain ETF excitement driven rallies not once but thrice in 2023 due to slow developments compounded by a harsh macro backdrop.
The risk that the current rally will pullback persists. Earlier this week, price action was significantly influenced by investors speculating on the approval of Blackrock spot ETF (IBTC). The rumours have been spurred by the listing, delisting, and relisting of the ticker on Depository Trust and Clearing Corporation (DTCC) website.
BITCOIN BULL RUN PRECEDE ALTCOIN RALLIES
In stark contrast to BTC’s rally, other major cryptocurrencies have lagged pushing BTC dominance to its highest since 2021.
ETH has rallied 15% over the past week. ETH underperformance relative to BTC has pushed the ratio between them to levels unseen since 2021.
Altcoin underperformance is unusual. During past BTC rallies, ETH price tops lagged BTC tops by a month. This is a consequence of capital rotation within crypto.
In past rallies, asset rotation can be seen in three distinct waves starting with (1) increase in BTC capital, (2) ETH rotation, followed by (3) increasing stablecoin flows.
MARKET METRICS AND ON-CHAIN SIGNALS
A raft of market metrics points to bullish sentiment in crypto markets due to resilient Long-Term Holders (LTH), limited profits at current levels, and strained supply which is expected to be exacerbated by demand from spot ETFs.
More importantly, market metrics indicate a higher bullish sentiment for ETH.
FUTURES AND OPTIONS POSITIONING
Leveraged funds have built up net short positioning over the last few weeks in BTC futures. Contrastingly asset managers have setup net long positioning. In options, BTC full size options have a bullish P/C ratio of 0.51 and Micro BTC options have a P/C ratio of 0.76.
In contrast, leveraged funds bullish on ETH have switched from net short to net long positioning last week. Full size ETH options have bullish P/C ratio of 0.38 and Micro ETH options have P/C ratio of 0.38.
Overall, leveraged funds and option markets are more bullish on ETH compared to BTC.
TRADE SETUP
BTC prices may pullback relative to ETH in the short term given price divergence. CME’s suite of crypto futures can be deployed to harness gains from this trend reversal.
The hypothetical spread posited in this paper consists of two legs: (1) long position in Micro ETH futures expiring on November 24th (METX3) and, (2) short position in Micro BTC futures expiring on the same date (MBTX3).
Each lot of Micro ETH futures provide exposure to 0.1 ETH while each lot of Micro BTC futures provides exposure to 0.1 BTC. To balance notional values, nineteen lots of METX3 are required for each lot of MBTX3 at current prices
● Entry: 19.090
● Target: 17.58
● Stop Loss: 20.000
● Profit at Target: USD 276
● Loss at Stop: USD 169
● Reward to Risk: 1.6x
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme/.
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
Full Disclaimer - linktr.ee/mintfinance
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