BTC: Crypto Staged a Strong Comeback in Q1

CME: Micro Bitcoin (MBT1!) and Micro ETH (MET1!)
In First Quarter 2023, Cryptocurrencies rebounded strongly amid turmoil in the financial markets. CME Micro Bitcoin Futures (MBT) gained $11,825 or +71% year-to-date. Micro ETH Futures (MET) gained $510 or +39% YTD.

Bitcoin rallied amid the collapses of Silicon Valley Bank and Credit Suisse. While US government came to the rescue and Credit Suisse was taken over by UBS, crypto prices did not fall back down.

Gold, the traditional hedging asset, rallied in response to the SVB failure. Gold Futures (GC) recorded a YTD gain of +6.5%, while Silver Futures (SI) was down 3%.
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US Equity Market was mixed in Q1. Nasdaq 100 has the best performance. NQ futures recorded a YTD return of +18.5%. S&P 500 (ES) was up 5.5% only, while Russell 2000 (RTY) turned up merely 2.7%. The Dow Jones Industrial Average was down 1.1%.
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What to Invest in a Flight-to-Safety
The fact that Crypto becomes the biggest winner in a flight-to-safety is remarkable.

Last year, as inflation was flying high and the Fed raised interest rates aggressively, investors flocked to the US dollar. Strong exchange rate and high yield make it a logical choice of safe investment.

We had expected the economic slowdown to start from the housing market and the high-tech industry. However, we found cracking at the heart of economy, the US banking system. Systemic risk is a clear and present danger facing us today. Bank runs spread from midsize banks to investment bank. Panicked investors pull money out of banks and also dump bank stocks and debts. Credit default swaps skyrocket.

In a new "Risk-Off" mode, investors abandoned fiat money and moved their asset into cryptocurrencies. For the first time, dollar is being viewed as a risky asset. This may be a game changer long-awaited by the crypto industry.

Crypto: A Separate Set of Risks
Last year, the entire crypto market lost $1.4 trillion as BTC fell from 67K to 16K. Big event risks include the failure of stable coin terraUSD, the collapses of the No. 2 crypto Exchange FTX and crypto lender Silvergate.

Outside of market risk, the biggest risk is a regulatory one. This week, US regulator Commodity Futures Trading Commission (CFTC) charges Binance against its illegal operations.

The CFTC has filed a civil enforcement action in the U.S. District Court of Illinois, charging Binance and three entities that operate the Binance platform with numerous violations of the Commodity Exchange Act (CEA) and CFTC regulations. The complaint charges that Binance operates a centralized digital asset trading platform through an intentionally opaque common enterprise. The defendants allegedly chose to knowingly disregard applicable provisions of the CEA while engaging in a calculated strategy of regulatory arbitrage to their commercial benefit.

In its continuing litigation against the defendants, the agency seeks disgorgement, civil monetary penalties, permanent trading and registration bans, and a permanent injunction against further violations of the CEA and CFTC regulations.

The above illustrates the legal and regulatory risks faced by many crypto operators. Decentralization means that you are not protected by any government. Parking your Bitcoin at a crypto Exchange does not come with a 250K FDIC depository insurance.

None of crypto Exchanges have been in existence for over a decade. Thus, their business models are not fully tested in a boom-and-bust cycle.. So counter-party risk is the key. Watch who you're doing business with very carefully.

Short-term Investment Strategies
"Buy-low-and-Sell-high" is a well-tested investment strategy. But spotting the bottom is very difficult in the crypto world. If you rushed in when BTC dropped from 67K to 50K, you would still lose half of your money a year later. Instead of HODL (“Hold On to your Dear Life”), short-term trades may work better for high-beta assets such as Bitcoin and Ether.

CME Micro BTC futures (MBT) is useful for both bullish and bearish strategies. Contract notional is 1/10 of 1 BTC. Initial margin is $800. Today, BTC rallies by $1,064 to $28,393. If you purchased BTC in the spot market, you would realize a daily gain of 3.8%.

If you own a long MBT position, the dollar gain is $106, corresponding to 1/10 of a BTC. The theoretical return would be 13.2% (=106/800), which is 2.5 times higher.

Similarly, CME Micro ETH future (MET) has a contract notional of 1/10 of 1 ETH. Initial margin is $61. Today, ETH went up by $14 to $1,792, or +0.8% in the spot market. But a long Micro ETH futures position would gain 2.3% (=1.4/61), which is 1.9 times higher.

Investing in the CME market, investors could rest-assured to be free from default risk and counter-party risk. In its 175-year history, there was never a case of clearing member default resulting in a loss of customer fund.

Happy Trading.

Disclaimers
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.

CME Real-time Market Data help identify trading set-ups and express my market views. 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/
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Jim W. Huang, CFA
jimwenhuang@gmail.com
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