AD Derivatives Newsletter: Fed Policy Shifts & Mt.Gox liquidations

USA Week Ahead (ET):

1. Monday 12pm: Powell Speaks

2. Tuesday 2:45pm: Fed Gov Speaks

3. Wednesday 2pm: Fed Beige Book

4. Friday: Fed Governors Speak

Disclaimer: Nothing here is trading advice or solicitation. This is for educational purposes only.

Authors have holdings in BTC, ETH, and Lyra and may change their holdings anytime.

MACRO

The tide has started to turn for Fed policy. Instead of persistently high inflation and a strong labor market, we’ve finally started to get labor market weakness combined with a lower CPI print in June.

Chart: WSJ.Com

CPI came in at +3% y/y, this has been the lowest reading since June 2023. 

More impressive, however, was the Core CPI print from May → June being only +0.1% m/m, which is the lowest print since January 2021. 

Chart: CME FedWatch Tool - July

CME futures markets are pricing in only a 6.7% chance of a rate cut for the July 31st FOMC decision, according to the CME FedWatch tool. 

Chart: CME FedWatch Tool - September

However, the odds of AT LEAST one rate cut in the September FOMC are about 94%, according to the CME FedWatch tool. 

Chart: Think Or Swim, Gold Futures

Rates moved lower, Gold moved back near ATHs and the small cap stocks had a monster rally, on the back of potential rate cuts. 

This easing narrative should also help the crypto markets move higher. 

BTC: $59,918 (+5.0% / 7-day)

ETH :$3,187 (+6.8% / 7-day)

SOL :$144.28 (+5.1% / 7-day)

Crypto

On the back of a fundamental trifecta, I expect Bitcoin to be soon reaching a bottom here (as my base-case scenario). Let’s explore. 

Bitcoin prices dropped from $72k on June 7th down to low of $55k on July 7th. 

First, this coincides nicely with the $2,900,000,000 worth of Bitcoin liquidation by the German government. This BTC was seized from the pirating site Movie2k.

Chart: Arkham.com

The German government liquidated all the coins in 3-weeks by selling them on Kraken, bc1q and transactions over the counter. 

The Block

The next big liquidation event is the Mt.Gox creditor claims, which seems to have about $9,000,000,000 of BTC behind it. 

The distribution is likely to be a mix of fiat and underlying BTC, which will dilute the total potential selling effect to something smaller than $9b. 

Chart: BTC Term Structure & Fwd volatility

Interestingly enough (except for the very short-term options) we have a Contango term structure shape. This seems a bit counterintuitive to me since the German government selling caused the market to move and RV to pickup. 

Mt.Gox is supposed to start distributions in July as well. 

Aug 2nd and Aug 30th expirations are the cheapest expirations on the curve. 

Given the Mt.Gox event, there could be decent gamma here. 

Chart: 7-day VRP

For context the Movie2k liquidation event gave vol buyers a nice return as the 7-day RV moved to 75% and options traded +30% points too cheap (using the VRP calc.) 

Coindesk.com

The biggest fundament news over the weekend was the Trump assassination attempt. Absolutely insane. 

This has improved the odds of a Trump presidency. Trump being the pro-crypto president should help galvanize the crypto currency bids. 

In the volatility markets, what seems interesting is the opportunity to capitalize on the recent spot sell-off to buy the risk-reversal. 

Chart: ∆25 RR for BTC

Given that more clarity w.r.t. to the Trump presidency will come with time and the context of potential new ATHs for BTC by the end of the year (the base-case for bulls), we could easily see the option RR move higher to make new highs too. 

Chart: 90-day $value of Basis

Often forgotten about is the delta “pickup” from basis expansion should the bull market resume and make new all-time highs. 

We can see above that the 90-day basis has about $3,000 of potential expansion if spreads attain levels seen earlier in April of this year.

When all is said and done, I’d argue we are seeing a decent opportunity now to grab exposure and maybe a Mt.Gox sell-off to add exposure.

After Mt.Gox, the bullish scenario seems to take us into new ATHs by EOY.

Paradigm's Week In Review

BTC +1.70% / ETH +3.38% / NDX -0.33%

Paradigm Top Trades this Week

Weekly BTC Cumulative Taker Flow

Weekly ETH Cumulative Taker Flow

BTC Cumulative OI

ETH Cumulative OI

BTC

ETH

The Squeethcosystem Report

Crypto markets remained active, ending the week down. ETH ended the week +10.56% and oSQTH ended the week at +19.79%.

Volatility

oSQTH IV remains sub 60% vs. its ref vol. at 62.75%.

Crab Strategy

Crab saw large gains ending the week +4.39 in USDC terms.

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AMBERDATA DISCLAIMER: The information provided in this research is for educational purposes only and is not investment or financial advice. Please do your own research before making any investment decisions. None of the information in this report constitutes, or should be relied on as a suggestion, offer, or other solicitation to engage in, or refrain from engaging, in any purchase, sale, or any other investment-related activity. Cryptocurrency investments are volatile and high risk in nature. Don't invest more than what you can afford to lose.