Monthly market Wrap-Up: Low volatility and shorts in the squeezer

04 Nov 2022

Monthly market Wrap-Up: Low volatility and shorts in the squeezer

October is done and dusted, and crypto markets still remain largely idle in the burdensome depths of the crypto credit crisis over the summer. Price-wise, we’ve seen no material changes from last month, but under the hood, the market is a-changing.

Short term

Bitcoin is currently priced attractively, but the trading range holds firm. In the current regime, the most prudent approach is to participate through spot market purchases. Leverage is declining in force, but the trading range holds firm, and leverage is still very high, leading the potential of ripping squeezes to remain elevated. With these tendencies in mind, traders should still avoid leverage and prioritize incentivized dollar cost averaging at attractive prices.Shorts are on the losing edge of the momentum, leading to the largest short squeeze since July 2021. However, the recent squeeze has had a minimal impact on prices. I believe this is caused by a mixture of more efficient liquidation engines on FTX and a relatively high willingness to sell BTC at prices above $20k. In notional sums, leverage is still at levels twice as high as those seen throughout 2021, and I would still advise prudency related to leveraged involvement in crypto at the moment. It’s still time to straddle up. Volatility is uniquely low in BTC at the moment, on par with the volatility seen in U.S. equities, and options are getting cheaper every day due to backward-looking volatility expectations among options traders. Far-dated expiries in BTC options are currently trading at 2-year low IVs. I expect volatility to erupt sooner rather than later, and I firmly believe straddle strategies are priced attractively now. Prepare for shaky markets in early November, as the event calendar is enormously busy in the first half of the month. Tomorrow comes the first major catalyst with another FOMC press conference, which has become growingly volatile as the tightening cycle prevails. Apart from the FOMC, non-farm payrolls, U.S. mid-term elections, and Q3 earnings from crypto behemoths MicroStrategy, Coinbase, Block, and Robinhood will all occur within the first eight days of November. Speaking of MicroStrategy, I still expect MicroStrategy’s BTC purchases to begin in early to mid-November. I will be surprised if there are no MicroStrategy announcements by the end of November. MicroStrategy purchases could lead BTC to pop and later drop, moisturized by animal spirits and a sudden significant bidder.

Medium-term

My directional medium-term outlook is currently ambiguous, as I expect the environment to be extremely dependent on U.S. monetary policy. Two scenarios, dependent on the coming (and the next) FOMC, will impact my medium-term view.. Scenario 1: Jerome Powell remains astute in combatting inflation and prepares the market for further hikes. This is, in my opinion, the most plausible scenario. In this environment, I expect correlations between BTC and other asset classes to remain elevated and the now 4.5-month-long trading range to hold firm, with dampened activity, leading to a longer-lasting opportune environment to stack sats. Scenario 2: Jerome Powell provides subtle pivot hints. In this scenario, I see the correlated market environment softening. Last week, we saw how unique structural crypto-related market activity caused correlations to decline through a substantial short squeeze. Pivot anticipations will lead to similar reactions and revitalize BTC's digital gold narrative. Aftermath: Hawkish FOMC press conference. I lean towards lengthening consolidation range, with BTC outperforming U.S. equities.

Long-term

BTC’s long-term adoption prospects still look very good, and BTC at $20k seems like a bargain through longer lenses. We still see increased institutional interest in crypto, even though we’re still battling bear market depths. A recent Fidelity survey shows that the number of institutional investors that view digital assets as something that should be a part of investment portfolios grew in 2022, and I expect increased institutional market participation as crypto gets a clearer regulatory framework in the EU and U.S. This article is a part of the section of our new market report: Ahead of the curve