Ahead of the curve - November 29

We’re pleased to share the fifth edition of our new market report, “Ahead of the Curve”. The report is free for now, replacing The Weekly Update, but will soon become a paid report. Enjoy this week's free access, and check out the report before it becomes a paid product. Click here to download the report BTC stays rangebound The crypto market saw a recovery last week, but overall the market structure remains closely aligned with what we noted last week. Trading volumes are still trending down, and derivatives traders remain cautiously positioned. BTC saw 5% gains in the last week, and a new trading range seems to be forming between $15,000 and $17,000. ETH saw unique sell-side pressure last week driven by FTX hack-related activity but has recovered from last week's losses. The rolling 30-day correlation between ETH and BTC sits at unusually high levels of 0.96 and has only been higher 3% of the time since December 2016. The only periods affiliated with higher correlations between ETH and BTC occurred in late November 2018, early March 2019, after the Covid crash, and after the 3AC meltdown. The crypto market is thus currently extraordinarily correlated, and BTC is the predominant directional force. Softening correlations – New regime? In light of crypto-specific contagion, correlations between BTC and U.S. equities have naturally declined. Correlations have remained soft since the FTX collapse, assessed through both long-term rolling correlations and granular intraday price patterns. Bitcoin did not absorb the positive equity response to the lower-than-expected CPI release of November 10 as contagion occupied bitcoin traders’ mindshare, and since, the economic calendar has been quiet. Bitcoins reduced market cap, reduced liquidity, and 77% drawdown may lead to stickiness of a weaker correlation between BTC and U.S. equities. The lower market cap, currently sitting at $317bn, has led BTC’s size to reach a less relevant size related to potential beta exposure to macro headwinds. Further, the reduced liquidity in the markets may disincentivize sophisticated funds to employ macro trading strategies associated with BTC. Lastly, the 77% decline from ATHs may represent levels at or near prices where determined buyers seek to build exposure regardless of the economic climate. However, the last few weeks have been slow related to economic data. Activity will gradually pick up in the coming weeks. Nonfarm payrolls and a Jerome Powell speech this week may provide clues whether the structural correlations have calmed. We’ll have to wait until the December 13 CPI release and December 14 FOMC press conference to assess whether the correlated relationship has firmly softened. Zooming out BTC’s bear market has now lasted at lengths comparable to the bear markets of 2014-15 and 2018. This cycle has for now seen a max drawdown of 77% in BTC from peak to trough, with the current bottom occurring 376 days after the peak of November 10, 2021. In the 2014 bear market, BTC’s peak-to-trough drawdown of 85% lasted for 407 days, while the 2018 top to bottom of 84% lasted for 364 days. Thus, while the current drawdown duration has been at comparable lengths to previous cycles, the depths are higher for now.