ETH - Lesser of the Two Crypto BearsCrypto winter is here. Is this the darkest before dawn? Or the start of a long artic winter ahead?
In such nebulous times, directional bets are rife with risks. In contrast, spread trades vastly lowers risk while enabling limited but durable returns.
Set against the current macro backdrop and landscape shift in the industry, this case study will argue that Ether exhibits greater price resilience relative to Bitcoin prices.
Accordingly, a long position in CME Micro Ether Futures combined with a short position in CME Micro Bitcoin Futures provides an opportunity to extract yield in a bearish market.
Spread entry at 0.0721 with a target at 0.0793 delivers a reward to risk ratio of 1.88 with returns of $1,660. A stop loss of 0.0684 will limit losses from the spread trade to $880.
A RESILIENT ETHER?
Crypto winter plus recession fears in major economies will keep crypto prices subdued with continuing downside pressure.
After a successful massive upgrade last year, the Ethereum blockchain reduced its carbon footprint. Next big enhancement is the Shanghai upgrade expected in March. This upgrade enables withdrawal of staked Ether representing ~13% of the entire supply.
Staked Ether withdrawal will be gradual. Even though this might increase selling pressure, it will be less so relative to what Bitcoin faces as described below.
GBTC LINKED BITCOIN SELLING PRESSURE
Last November, Genesis (a major crypto lender) halted withdrawals citing a $1 billion shortfall. Genesis is looking to avoid bankruptcy filing. Its bankruptcy could spell contagion in crypto markets accelerating selling pressure.
Genesis’ parent company Digital Currency Group ("DCG") operates the Grayscale Bitcoin Trust. Grayscale’s flagship product GBTC has suffered sharp sell-off resulting in a staggering 45% discount to NAV presently.
Grayscale’s attempt to convert GBTC to a spot BTC ETF allows them to rebalance their holdings to narrow the discount. But their application to transform into an ETF has been denied by the SEC. Grayscale is appealing against the SEC’s decision in court with an outcome anticipated this quarter.
If the ruling goes against them, Grayscale plans to offload up to 20% of GBTC shares leading to sales of 128,000 bitcoins which will send its prices tanking.
BITCOIN MARKET CYCLES – WILL HISTORY REPEAT? PERHAPS NOT.
Crypto winter is not new. Previous winter cycles of extended periods of subdued price action were followed by massive bull rally. Hope springs eternal but this time could be different.
Bitcoin as an asset class will face recessionary environment for the first time ever. Unlike in 2018, long term holders (>1Y) have not moved their holdings this time around but hold massive losses on their portfolios down some 50% to 80% which could aggravate bitcoin downside pressures when selling begins.
POOR FUNDAMENTALS BUT NEUTRAL TECHNICAL SIGNALS IN BITCOIN
Bitcoin’s long-term moving average has served as a strong resistance and continues to be in a downtrend.
Falling realised volatility points to a sideways market with limited liquidity and leverage. Declining market volume vindicates that. Orange Fibonacci retracement level which proved to be strong resistance also coincides with the pivot level P could be challenged once the Grayscale-SEC court ruling is out later this quarter.
ETHER TECHNICALS POINT TO A SIDEWAYS MARKET DESPITE OUTPERFORMANCE OVER BITCOIN
Ether has remained highly correlated with Bitcoin for the past two months. The long-term (100-day) moving average has served as a weak resistance as Ether broke through this level during November. The long-term moving average has become flat over the past two months in sharp contrast to a bearish one for Bitcoin.
In the previous period of low HV (October to November), Ether outperformed Bitcoin by a stunning 22%.
Stochastic for both Bitcoin and Ether point to oversold levels.
OPTIONS MARKET FAVORS ETHER OVER BITCOIN
Bitcoin has a put/call ratio of 2.5 on the CME in sharp distinction to Ether’s put/call ratio of only 0.8. On Deribit markets, put call for Ether is two-times lower relative to Bitcoin. Options traders clearly favor Ether over Bitcoin.
TRADE SETUP
A spread position of long CME Micro Ether Futures and short CME Micro Bitcoin futures.
Spread trades require notional values of each leg to be equal. Each contract of CME Micro Ether Futures and CME Micro Bitcoin Futures both expiring in Feb 2023 provides exposure to 0.1 Ether ($120) and 0.1 Bitcoin ($1,665), respectively.
Fourteen (14) lots of long positions in CME Micro Ether Futures will provide a notional value of $1,680 to offset one lot of CME Micro Bitcoin Futures which has notional $1,665.
Entry: 0.0721
Target: 0.0793
Stop Loss: 0.0684
Reward/Risk Ratio: 1.88
Profit at Target: $1,660
Loss at Stop Loss: $880
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 www.tradingview.com
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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.
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