U.S. stocks rose Friday but finished the week with losses after the monthly jobs report did little to shift expectations for continued interest-rate increases from the Federal Reserve.

Stocks have come under pressure in recent days as central banks, including the Fed and the Bank of England, aggressively raise interest rates to combat inflation. Fed Chairman Jerome Powell signaled this week that officials might raise borrowing costs next year more than they had projected.

👉 Crypto Market Update

• Global Crypto Market Cap: $1.1 Tn.

• Altcoin Share of Market: $692 Bn.

• Crypto Fear & Greed: 38 (Fear).

🔶 BTC - $21,312.51 (0.28%)

🔷 ETH - $1,637.51 (-1.92%)

🟣 SOL - $37.51 (2.29%)

🔴 AVAX - $19.95 (-0.66%)

🔵 ADA - $0.430653 (1.01%)

⭕️ DOT - $7.10 (0.99%)

⚫️ NEAR - $3.36 (0.73%)

⚛️ ATOM - $15.64 (2.97%)

👻 AAVE - $97.86 (1.74%)

EOW 44 | Ledgerprime

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U.S. stocks slipped as the Federal Reserve prepared this week to discuss how much more to raise interest rates as it tries to calm inflation.

The Fed’s rapid interest-rate increases have battered markets for much of the year, leaving some investors searching for even the faintest sign that it is time to put their money to work again.

This week, traders are shuffling their holdings ahead of Wednesday, when Fed officials are almost certain to raise interest rates by another 0.75 percentage point.

👉 Crypto Market Update

• Global Crypto Market Cap: $1.05 Tn.

• Altcoin Share of Market: $661 Bn.

• Crypto Fear & Greed: 30 (Fear).

🔶 BTC - $20,474.18 (0.49%)

🔷 ETH - $1,575.23 (1.39%)

🟣 SOL - $32.49 (-0.13%)

🔴 AVAX - $18.78 (-0.91%)

🔵 ADA - $0.404370 (1.01%)

⭕️ DOT - $6.52 (-1.01%)

⚫️ NEAR - $3.08 (0.69%)

⚛️ ATOM - $14.05 (0.69%)

👻 AAVE - $84.76 (1.87%)

BOW 44 | Ledgerprime

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U.S. stocks rose Friday, with big gains by Apple helping offset declines among consumer discretionary stocks weighed down by a sales warning from e-commerce giant Amazon.

Octobers are often billed as bad luck by traders since the stock-market crash of 1929, and Black Monday both took place during the month. This year, however, the Dow industrials are on track to finish October up more than 14%, which would be its best monthly performance since January 1976.

👉 Crypto Market Update

• Global Crypto Market Cap: $1.04 Tn.

• Altcoin Share of Market: $645 Bn.

• Crypto Fear & Greed: 34 (Extreme Fear).

🔶 BTC - $20,874.45 (1.50%)

🔷 ETH - $1,632.53 (5.43%)

🟣 SOL - $33.04 (6.39%)

🔴 AVAX - $18.51 (5.22%)

🔵 ADA - $0.407379 (3.52%)

⭕️ DOT - $6.55 (1.50%)

⚫️ NEAR - $3.06 (2.97%)

⚛️ ATOM - $13.51 (0.77%)

👻 AAVE - $84.75 (2.01%)

EOW43 | Ledgerprime

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U.S. stocks gained on Monday as investors focused on encouraging signs from corporate earnings and hopes that the Federal Reserve would slow the pace of interest-rate increases.

Last week, the Dow notched its best three-week stretch since November 2020, offering investors a reprieve from the selling pressure that has whipsawed portfolios this year. The rally was kicked off, in part, by a batch of corporate earnings—particularly from banks and airlines—that offered an encouraging outlook on the U.S. economy. Stocks then raced higher on the possibility of shifting to smaller interest-rate increases in December.

👉 Crypto Market Update

• Global Crypto Market Cap: $985 Bn

• Altcoin Share of Market: $614 Bn

• Crypto Fear & Greed: 20 (Extreme Fear)

🔶 BTC - $19,585.89 (2.34%)

🔷 ETH - $1,400.78 (5.01%)

🟣 SOL - $30.20 (4.51%)

🔴 AVAX - $16.42 (3.43%)

🔵 ADA - $0.3748 (4.46%)

⭕️ DOT - 5.83 (0.15%)

⚫️ NEAR - $2.90 (3.56%)

⚛️ ATOM - $11.70 (3.98%)

👻 AAVE - $83.02 (2.72%)

BOW43 | Ledgerprime

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The Dow Jones Industrial Average raced to its best three-week stretch since November 2020, boosted by the prospect of a slower pace of interest rate increases and the latest batch of corporate earnings.

Investors have been closely watching earnings for clues on how rising rates, a strong dollar, and high inflation are affecting company profits. Results for the third quarter have thus far been a mixed bag. U.S. banks helped boost markets earlier this week with better-than-expected results, but cracks are showing elsewhere. So far, the net profit margin of S&P 500 companies in the third quarter is set to decrease for the fifth consecutive period.

👉 Crypto Market Update

• Global Crypto Market Cap: $961 Bn

• Altcoin Share of Market: $592 Bn

• Crypto Fear & Greed: 20 (Extreme Fear)

🔶 BTC - $19,226.28 (1.37%)

🔷 ETH - $1,316.44 (2.82%)

🟣 SOL - $28.03 (2.93%)

🔴 AVAX - $15.70 (4.36%)

🔵 ADA - $0.3499 (3.60%)

⭕️ DOT - 5.83 (0.15%)

⚫️ NEAR - $2.90 (3.56%)

⚛️ ATOM - $11.70 (3.98%)

👻 AAVE - $83.02 (2.72%)

EOW42 | Ledgerprime

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U.S. stocks surged Monday, another day of outsize moves on Wall Street, as investors tried to make sense of an unsettled economic outlook and geared up for another batch of corporate earnings.

Experts claim that the big gains and losses underscored angst over a possible recession and the pace of interest-rate increases, rather than fundamental changes in the economy. Adding to those worries, recent inflation data showed rapid price growth has been hard to slow, making it more likely that the Federal Reserve will continue to raise rates aggressively.

👉 Crypto Market Update

• Global Crypto Market Cap: $975 Bn

• Altcoin Share of Market: $532 Bn

• Crypto Fear & Greed: 22 (Extreme Fear)

🔶 BTC - $19,404.50 (0.60%)

🔷 ETH - $1,308.08 (0.89%)

🟣 SOL - $30.32 (0.75%)

🔴 AVAX - $15.89 (0.29%)

🔵 ADA - $0.3648 (-1.02%)

⭕️ DOT - $6.12 (0.02%)

⚫️ NEAR - $2.96 (-0.30%)

⚛️ ATOM - $12.36 (5.28%)

👻 AAVE - $79.19 (3.81%)

BOW42 | Ledgerprime

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U.S. stocks fell Friday, the latest U-turn for markets after a volatile week marked by big swings in both directions.

Outsize moves both to the upside and downside show just how jittery investors have gotten this year. Inflation has remained uncomfortably high, despite the Fed raising rates at the fastest pace since the early 1980s. Economic growth is also slowing. That has made many investors build up bets against the market—which they have then sometimes, as in Thursday’s case, abruptly unwound.

👉Crypto Market Update

• Global Crypto Market Cap: $958 Bn

• Altcoin Share of Market: $592 Bn

• Crypto Fear & Greed: 24 (Extreme Fear)

🔶 BTC - $19,163.79 (-1.65%)

🔷 ETH - $1,288.57 (-2.44%)

🟣 SOL - $29.98 (-3.60%)

🔴 AVAX - $15.72 (-1.94%)

🔵 ADA - $0.3674 (-2.08%)

⭕️ DOT - $6.08 (-1.28%)

⚫️ NEAR - $2.99 (-2.51%)

⚛️ ATOM - $11.56 (-3.50%)

👻 AAVE - $72.71 (-1.06%)

EOW41 | Ledgerprime

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U.S. stocks fell Monday, continuing a stretch of volatility as concerns about Federal Reserve tightening, escalation in the Ukraine war, and China-trade policy shake markets.

Shifting expectations about more interest-rate increases from the Fed have been the primary driver of recent stock-swings. Friday’s jobs report showed the labor market is still tight as the unemployment rate fell back to a half-century low, exacerbating concerns that the Fed could tighten financial conditions more aggressively.

👉Crypto Market Update

• Global Crypto Market Cap: $962 Bn

• Altcoin Share of Market: $596 Bn

• Crypto Fear & Greed: 24 (Extreme Fear)

🔶 BTC - $19,064.44 (-0.92%)

🔷 ETH - $1,277.85 (-2.14%)

🟣 SOL - $31.35 (-3.50%)

🔴 AVAX - $16.01 (-3.82%)

🔵 ADA - $0.397(-4.61%)

⭕️ DOT - $6.19 (-2.34%)

⚫️ NEAR - $3.18 (-7.76%)

⚛️ ATOM - $12.32 (-3.43%)

👻 AAVE - $71.74 (-3.62%)

BOW41 | Ledgerprime

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U.S. stocks slid Friday after a relatively strong jobs report, capping a roller-coaster week in which investors built up hopes for easier monetary policy—only to then give them up again.

Crypto tokens were back in the red during the early hours on Friday ahead of the US Jobs data. The macroeconomic fears are quite evident in the riskier asset class.

👉Crypto Market Update

• Global Crypto Market Cap: $984 Bn

• Altcoin Share of Market: $611 Bn

• Crypto Fear & Greed: 24 (Extreme Fear)

🔶 BTC - $19,486.51 (-0.59%)

🔷 ETH - $1,323.78 (-0.49%)

🟣 SOL - $32.80 (-0.10%)

🔴 AVAX - $16.84 (-0.17%)

🔵 ADA - $0.42502 (0.45%)

⭕️ DOT -$6.33 (0.76%)

⚫️ NEAR - $3.52 (-0.73%)

⚛️ ATOM - $13.05 (2.30%)

👻 AAVE - $75.14 (-1.61%)

EOW40 | Ledgerprime

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U.S. stock futures rose, putting major indexes on course to extend a strong start to the latest quarter, while a falling dollar and government bond yields offered investors some tentative relief.

Stocks have welcomed signs that some of the headwinds facing them are easing. Government-bond yields and the U.S. dollar have slumped in recent days after both rose to multiyear highs, while oil prices have failed to recoup recent losses, easing concerns about inflation. Meanwhile, some investors have continued to hope that weaker-than-expected U.S. data releases would temper the Federal Reserve’s aggressive cycle of interest rate rises—despite Fed officials’ insistence to the contrary.

👉Crypto Market Update

• Global Crypto Market Cap: $999 Bn

• Altcoin Share of Market: $616 Bn

• Crypto Fear & Greed: 20 (Extreme Fear)

🔶 BTC - $20,115.63 (3.61%)

🔷 ETH - $1,351.54 (3.94%)

🟣 SOL - $34.22 (3.59%)

🔴 AVAX - $17.41 (3.04%)

🔵 ADA - $0.433 (2.28%)

⭕️ DOT - $6.47 (2.67%)

⚫️ NEAR - $3.61 (3.62%)

⚛️ ATOM - $13.16 (5.75%)

👻 AAVE - $78.59 (4.10%)

Bow40 | Ledgerprime

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U.S. stocks fell Friday, closing out a losing week, month and quarter as investors wrestled with more signs of persistently high inflation. Stocks had rallied for two months beginning in June as investors hoped that inflation would cool and the Fed would pull back on its aggressive rate increases. Still, price pressures have remained stubbornly high, and Fed officials made clear that the monetary tightening would continue. Last week, the central bank unveiled another supersize rate increase and signaled that additional large rate raises were likely.

👉Crypto Market Update

• Global Crypto Market Cap: $979 Bn

• Altcoin share of Market: $563 Bn

• Crypto Fear and Greed Index: 20 (Extreme Fear)

🔶 BTC - $19.347.74 (-0.89%)

🔷 ETH - $1,324.72 (-0.55%)

🟣 SOL - $32.98 (-2.03%)

🔴 AVAX - $17.19 (-0.83%)

🔵 ADA - $0.432 (-0.75%)

⭕️ DOT - $6.29 (-1.76%)

⚫️ NEAR - $3.56 (-0.75%)

⚛️ ATOM - $12.80 (2.03%)

👻 AAVE - $74.78 (-3.01%)

EOW39 | Ledgerprime

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U.S. stocks climbed mostly upward Monday morning. It marked a sharp turnaround from last week’s dismal performance when concerns about the world economy pushed financial markets into disarray.

👉Crypto Market Update

• Global Crypto Market Cap: $962 Bn

• Altcoin share of Market: $560 Bn

• Crypto Fear and Greed Index: 22 (Extreme Fear)

🔶 BTC - $20,229.46 (5.23%)

🔷 ETH - $1,393.79 (4.77%)

🟣 SOL - $35.13 (5.43%)

🔴 AVAX - $18.36 (5.3%)

🔵 ADA - $0.4584 (2.05%)

⭕️ DOT - $6.73 (3.91%)

⚫️ NEAR - $3.78 (2.38%)

⚛️ ATOM - $14.36 (1.55%)

👻 AAVE - $79.45 (4.52%)

Bow39 | Ledgerprime

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Stocks fell Tuesday ahead of the Federal Reserve’s next policy decision as investors grappled with the impact of rising rates on corporate earnings and valuations.

The central bank is expected to sharply raise interest rates again Wednesday in a bid to curb inflation, a move that will eventually slow the economy and likely ding company profits. At the same time, higher interest rates will constrain the prices that investors are willing to pay for a slice of those earnings.

Those hurdles could make it harder for major stock indexes to climb out of the gully in which they have found themselves nearly three-quarters of the way through 2022. The S&P 500 has fallen 19% this year, with rising interest rates eating into the lofty valuations that stocks enjoyed for much of the pandemic era.

Wall Street Journal, Sept. 20, 2022 5:05 pm ET

Crypto Market Update

• Global Crypto Market Cap 📉 3.45% ($970 Bn)

• Altcoin share of Market 📉 0.48% (60.55 %)

• Crypto Fear and Greed Index: 23 (Extreme Fear)

Crypto News & Articles

• Ethereum developer confirms Shanghai upgrade will not unlock staked tokens. The Ethereum website incorrectly states staking withdrawal functionality will be enabled in the Shanghai upgrade, leaving depositors in limbo. – Link

• Ethereum vanity address exploit may be cause of Wintermute hack. It may take less than 2 months to brute force hack an Ethereum vanity address using a GPU mining rig. – Link

• Experts argue SEC cannot claim jurisdiction over Ethereum transactions. – Link

 BTC (-3.13%) 

Price:

The current price at $19.09K, selling resistance is found at $19.5K, while some bull support appears at $18.50K. Over the week, the price ranged from a high of $21,316 to a low of $18,471.

Metrics:

• BTC spot volume is currently at $6.254B.

• The current Market Cap of BTC is at $410B, which represents 39.204% of the Total Crypto Market Cap.

• BTC volatility: The current annualized volatility is at 0.64, 8.57% lower than last week.

From last week:

•  📈 Correlations: 

  • 7-Day Correlation:  ETH (0.76)

  • 30-Day Correlation: ETH (0.84)

•  📈 Betas:

  • 7-Day Beta:  ETH (0.27)

  • 30-Day Beta: ETH (0.54)

News: 

• The market isn't surging anytime soon — so get used to dark times– Link

Options:

• This week’s BTC option profile has been tilted mostly towards the sell side, although the most traded option was a call. Clear interest in near expiries, with BTC-28OCT22-24000-C and BTC28OCT22-18000-P being the most traded

• 

• Strategies:

  • This week’s most traded strategy was the Short Risk Reversal, at a volume of 2.3K, followed by the Bear Call and Put Spread.

• IV profile: 

  • 1 Wk ATM 71.7% (avg: 65.9%)

  • 1 Mth ATM 66.5% (avg: 68.1%)

• 25d Skew:

  • 1 Wk 12% (avg: 11%)

  • 1 Mth 12% (avg: 13%)

 ETH (-7.95%) 

Price:

The current price at $1,343 current selling resistance is found above $1.4K, while bullish support takes place below the $1.3K mark. Over the week, the price ranged between a weekly high of $1,638 and a low of $1,295.

Metrics:

• ETH spot volume is currently at $965.52 M

• The current Market Cap of ETH is at $168B, which represents 17.22% of the Total Crypto Market Cap

• ETH volatility: The current annualized volatility is at 0.86, 6.63% higher than last week.

From last week:

•  📈 Correlations: 

  • 7-Day Correlation:  BTC (0.76)

  • 30-Day Correlation: BTC (0.84)

•  📈 Betas:

  • 7-Day Beta:  BTC (2.65)

  • 30-Day Beta: BTC (1.05)

• News: 

  • SEC Claims All of Ethereum Falls Under US Jurisdiction  – Link

• Options:

  • Ethereum’s option profile was a bit more optimistic, with calls such as the ETH-31MAR23-5000-C (59K) and the ETH-30SEP22-1600-C (28K) trading the most.

• Strategies:

  • This week, the most traded strategies for Ethereum have been the Bull Call Spread (118K) and the Bear Call Spread (98 K).

• IV profile: 

  • 1 Wk ATM 93% (avg: 98%)

  • 1 Mth ATM 87% (avg: 101%)

• 25d Skew:

  • 1 Wk 10% (avg: 8%)

  • 1 Mth 12% (avg: 9%)

 AVAX (-6.54%) 

Price:

The current price at $16.77, and selling resistance takes place above the $18.5 range, while the closest price support seems to be at $16.50. Over the week, the price ranged between a weekly high of $19.92 and a low of $16.52.

Metrics:

• AVAX spot volume is currently at $3.202M

• The current Market Cap of AVAX is at $5.38B, which represents 0.521% of the Total Crypto Market Cap

• AVAX volatility: The current annualized volatility is at 0.85, 7.06% higher than last week.

From last week:

•  📈 Correlations: 

  • 7-Day Correlation:  BTC (0.74), ETH (0.77)

  • 30-Day Correlation: BTC (0.80), ETH (0.83)

•  📈 Betas:

  • 7-Day Beta:  BTC (2.25), ETH (0.71)

  • 30-Day Beta: BTC (1.21), ETH (0.86)

• News: 

  • Apricot Phase 6: Native Asset Call Deprecation – Link

 SOL (-2.75%) 

Price:

The current price at $31.85, selling resistance seems to occur at $33.00, while price support seems to be found at $31.00. Over the week, the price ranged between a weekly high of $35.49 and a low of $30.77.

Metrics:

• SOL spot volume is currently at $93.72M

• The current Market Cap of SOL is at $11.55B, which represents 1.16% of the Total Crypto Market Cap

• SOL volatility: The current annualized volatility is at 0.84, 5.75% higher than last week.

From last week:

•  📈 Correlations: 

  • 7-Day Correlation:  BTC (0.76), ETH (0.78)

  • 30-Day Correlation: BTC (0.80), ETH (0.81)

•  📈 Betas:

  • 7-Day Beta:  BTC (2.06), ETH (0.69)

  • 30-Day Beta: BTC (1.14), ETH (0.79)

• News: 

  • Metaplex Set to Airdrop MPLX Tokens to Solana NFT Creators– Link

 NEAR (-4.93%)

Price:

The current price at $3.90, selling resistance is found above $4.05, while price support seems to drive buying action at $3.84. Over the week, the price ranged between a weekly high of $4.65 and a low of $3.84.

Metrics:

• NEAR spot volume is currently at $2.87M

• The current Market Cap of NEAR is at $3.29B, which represents 0.325% of the Total Crypto Market Cap

• NEAR volatility: The current annualized volatility is at 0.94, 2.32% higher than last week.

From last week:

•  📈 Correlations: 

  • 7-Day Correlation:  BTC (0.72), ETH (0.77)

  • 30-Day Correlation: BTC (0.68), ETH (0.70)

•  📈 Betas:

  • 7-Day Beta:  BTC (2.94), ETH (0.91)

  • 30-Day Beta: BTC (1.21), ETH (0.93)

• News: 

  • NEAR Launches Web3 Regional Hub in India for Blockchain Talent Development and Innovation – Link

 ADA (-5.55%) 

Price:

The current price is at $0.44, selling resistance at $0.49, while price support seems to be at the $0.44 level. Over the week, the price ranged between a weekly high of $0.489 and a low of $0.436.

Metrics:

• ADA spot volume is currently at $51.64M

• The current Market Cap of ADA is at $15.47B, which represents a 1.613% of Total Crypto Market Cap

• ADA volatility: The current annualized volatility is at 0.72, 7.01% lower than last week.

From last week:

•  📈 Correlations: 

  • 7-Day Correlation:  BTC (0.72), ETH (0.74)

  • 30-Day Correlation: BTC (0.74), ETH (0.76)

•  📈 Betas:

  • 7-Day Beta:  BTC (1.99), ETH (0.59)

  • 30-Day Beta: BTC (0.88), ETH (0.66)

• News: 

  • Cardano (ADA) Price Fails To Break $0.5 Despite Vasil Hype – Link

MPL (-8.34%)

Price:

Current price at $19.44, upwards selling resistance seems to be found at $22.00, while bullish action takes place at $19.50. Over the week the price ranged between a weekly high of $22.33 and a low of $19.50.

Metrics:

• MPL spot volume is currently at $10.504K

• Current Market Cap of MPL is at $125M, which represents a 0.014% of Total Crypto Market Cap

• MPL volatility: The current, annualized volatility is at 0.78, 8.98% lower than last week.

From last week:

•  📈 Correlations: 

  • 7-Day Correlation:  BTC (0.31), ETH (0.27)

  • 30-Day Correlation: BTC (0.28), ETH (0.27)

•  📈 Betas:

  • 7-Day Beta:  BTC (1.12), ETH (0.29)

  • 30-Day Beta: BTC (0.68), ETH (0.50)

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The market didn't like what it saw in Tuesday's CPI report. U.S. stocks fell and Treasury yields rose after the data came in higher than expected. 

The pace of U.S. consumer price inflation remained close to a four-decade high, up 8.3% in August from the same month a year ago, the Labor Department said Tuesday.

Still, that headline number cooled compared with previous months. The increase was 8.5% in July and 9.1% in June, which was the highest inflation rate in four decades. The CPI measures what consumers pay for goods and services.

Wall Street Journal,  Sep 13, 2022, at 11:00 am ET

Crypto Market Update

• Global Crypto Market Cap 📈 2.92% ($1.11 Tr)

• Altcoin share of Market 📉 5.83% (61.53 %)

• Crypto Fear and Greed Index: 34 (Fear)

Crypto News & Articles

• Chamber of Digital Commerce urges SEC to approve Bitcoin ETF for US investors. The Chamber of Digital Commerce said that the SEC's failure to approve a spot bitcoin ETF is forcing U.S. investors to turn to more regulated regions. – Link

• Fireblocks records over $100M in annual recurring revenue, solidifies unicorn status –  Link

• Centralization, sell-offs, and network stability: What’s troubling Ethereum ahead of the Merge? – Link

 BTC (+8.62%) 

Price:

Current price at $21.07K, selling resistance is found at $22.75K mark while major support appears at $20.75K. Over the week, price ranged from a high of $22.423 to a low of $18,650.

Metrics:

• BTC spot volume is currently at $8.907B.

• Current Market Cap of BTC is at $370B, which represents a 38.227% of Total Crypto Market Cap.

• BTC volatility: The current, annualized volatility is at 0.66, 25.52% higher than last week.

From last week:

•  📈 Correlations: 

  • 7-Day Correlation:  ETH (0.83)

  • 30-Day Correlation: ETH (0.87)

•  📈 Betas:

  • 7-Day Beta:  ETH (0.86)

  • 30-Day Beta: ETH (0.62)

News: 

• Stone Ridge board approved plan for 'liquidation and dissolution' of its Bitcoin fund – Link

Options:

• BTC continues to be dominated by the buy side after the weekend. Investors are interested in near OTM maturities such as the BTC-30SEP22-24000-C (3.5K) or the BTC-28OCT22-28000-C (1.6K).

• Strategies:

  • Investors have shifted their momentum and seem now interested in more optimistic strategies. This week the Bull Diagonal Spread (Calls) (3.5K) was the most traded structure, followed by the Bull Put Spread.

• IV profile: 

  • 1 Wk ATM 77.6% (avg: 64.5%)

  • 1 Mth ATM 72.4% (avg: 68.0%)

• 25d Skew:

  • 1 Wk -5% (avg: 10%)

  • 1 Mth 5% (avg: 12%)

 ETH (-2.94%) 

Price:

Current price at $1.6K, current selling resistance is found at $1.75K while bullish support takes place at the $1.6K mark. Over the week the price ranged between a weekly high of $1,780 and a low of $1,502.

Metrics:

• ETH spot volume is currently at $1.72B

• Current Market Cap of ETH is at $216B, which represents 20.015% of Total Crypto Market Cap

• ETH volatility: The current, annualized volatility is at 0.78, 6.04% lower than last week.

From last week:

•  📈 Correlations: 

  • 7-Day Correlation:  BTC (0.83)

  • 30-Day Correlation: BTC (0.87)

•  📈 Betas:

  • 7-Day Beta:  BTC (0.57)

  • 30-Day Beta: BTC (1.09)

• News: 

  • Norwegian central bank uses Ethereum to build national digital currency – Link

• Options:

  • With the Merge event on every trader’s mind, this week’s option profile was dominated by year-end, close-to-money call trading, with options such as the ETH-30DEC22-2500-C (18.5K) and the ETH-30DEC22-2000-C (16K).

• Strategies:

  • The Bull Put Spread and the Bear Call Spread were the most traded structures ahead of the Merge, at a volume of 18K each. This denotes the overall decrease in volume that we have seen since June.

• IV profile: 

  • 1 Wk ATM 114% (avg: 95%)

  • 1 Mth ATM 105% (avg: 105%)

• 25d Skew:

  • 1 Wk 3% (avg: 7%)

  • 1 Mth 8% (avg: 8%)

 AVAX (+1.01%) 

Price:

Current price at $19.71, selling resistance takes place above the $22 range while the closest price support seems to be at $19.50. Over the week the price ranged between a weekly high of $21.80 and a low of $18.03.

Metrics:

• AVAX spot volume is currently at $12.61M

• Current Market Cap of AVAX is at $5.61B, which represents a 0.558% of Total Crypto Market Cap

• AVAX volatility: The current, annualized volatility is at 0.77, 0.99% lower than last week.

From last week:

•  📈 Correlations: 

  • 7-Day Correlation:  BTC (0.72), ETH (0.76)

  • 30-Day Correlation: BTC (0.80), ETH (0.81)

•  📈 Betas:

  • 7-Day Beta:  BTC (0.87), ETH (0.77)

  • 30-Day Beta: BTC (0.99), ETH (0.73)

• News: 

  • Apricot Phase 6: Native Asset Call Deprecation – Link

 SOL (+2.52%) 

Price:

Current price at $34.83, selling resistance seems to occur at $39.00 while price support seems to be found at $35.00. Over the week the price ranged between a weekly high of $38.02 and a low of $30.61.

Metrics:

• SOL spot volume is currently at $215.70M

• Current Market Cap of SOL is at $12.36B, which represents 1.142% of Total Crypto Market Cap

• SOL volatility: The current, annualized volatility is at 0.74, 2.23% higher than last week.

From last week:

•  📈 Correlations: 

  • 7-Day Correlation:  BTC (0.72), ETH (0.73)

  • 30-Day Correlation: BTC (0.83), ETH (0.83)

•  📈 Betas:

  • 7-Day Beta:  BTC (0.50), ETH (0.37)

  • 30-Day Beta: BTC (0.98), ETH (0.74)

• News: 

  • DApp activity rises 3.7% in August for the first time since May: Finance Redefined– Link

 NEAR (-1.23%) 

Price:

Current price at $4.56, selling resistance is found at $5.10 while price support seems to drive buying action at $4.50. Over the week the price ranged between a weekly high of $5.22 and a low of $4.04.

Metrics:

• NEAR spot volume is currently at $95.25M

• The current Market Cap of NEAR is at $3.41B, which represents 0.347% of the Total Crypto Market Cap

• NEAR volatility: The current annualized volatility is at 0.90, 9.61% lower than last week.From last week:

From last week:

•  📈 Correlations: 

  • 7-Day Correlation:  BTC (0.58), ETH (0.59)

  • 30-Day Correlation: BTC (0.71), ETH (0.73)

•  📈 Betas:

  • 7-Day Beta:  BTC (0.40), ETH (0.43)

  • 30-Day Beta: BTC (0.98), ETH (0.81)

• News: 

  • NEARCON Highlights – Link

 ADA (-3.13%) 

Price:

Current price at $0.4717, with selling resistance at $0.51 while price support seems to be at the $0.47 level. Over the week the price ranged between a weekly high of $0.522 and a low of $0.456. 

Metrics:

• ADA spot volume is currently at $112.44M

• Current Market Cap of ADA is at $17.21B, which represents a 1.648% of Total Crypto Market Cap

• ADA volatility: The current, annualized volatility is at 0.78, 6.23% higher than last week.

From last week:

•  📈 Correlations: 

  • 7-Day Correlation:  BTC (0.68), ETH (0.76)

  • 30-Day Correlation: BTC (0.71), ETH (0.71)

•  📈 Betas:

  • 7-Day Beta:  BTC (0.81), ETH (1.02)

  • 30-Day Beta: BTC (1.00), ETH (0.76)

• News: 

  • Cardano (ADA) eyes 15% rally despite Charles Hoskinson's fear over 'macro factors' – Link

 MPL (-4.92%) 

Price:

Current price at $21.51, upwards selling resistance seems to be found at $23.00, while bullish action takes place at $21.50. Over the week the price ranged between a weekly high of $23.73 and a low of $18.58.

Metrics:

• MPL spot volume is currently at $4.984K

• Current Market Cap of MPL is at $144M, which represents a 0.013% of Total Crypto Market Cap

• MPL volatility: The current, annualized volatility is at 0.85, 19.65% lower than last week.

From last week:

•  📈 Correlations: 

  • 7-Day Correlation:  BTC (0.14), ETH (0.17)

  • 30-Day Correlation: BTC (0.21), ETH (0.21)

•  📈 Betas:

  • 7-Day Beta:  BTC (0.51), ETH (0.99)

  • 30-Day Beta: BTC (0.64), ETH (0.57)

Upcoming events 

For OTC inquiries, contact laura@ledgerprime.com 

Telegram @lauravidiella or @medianbrain 

For live Altcoin and Options data, join our Ledger Prime Analytics group chat here

The information provided here is not investment, tax, or financial advice and does not reflect LedgerPrime’s official stance on any position. You should consult with a licensed professional for advice concerning your specific situation.

U.S. stock indexes opened higher, suggesting major indexes could rise after three weeks of losses driven by expectations for tighter Federal Reserve policy and an energy crisis in Europe. 

The moves in the U.S. accompanied similar gains in European markets, which rebounded after falling Monday following Russia’s indefinite halt of natural-gas flows through a major pipeline.

Much of the recent anxiety in the U.S. has been driven by expectations that the Fed will barrel ahead with tighter monetary policy for much longer than once thought. Many investors are now expecting the Fed to lift interest rates by 0.75 percentage point for a third consecutive time at its meeting later this month.

Wall Street Journal, Sep. 6, 2022 9:44 pm ET

Crypto Market Update

• Global Crypto Market Cap 📉 0.11% ($1.04 Tr)

• Altcoin share of Market 📉 1.76% (62.34 %)

• Crypto Fear and Greed Index: 22 (Fear)

Crypto News & Articles

• Circle CEO says Binance decision to stop USDC support is good as it increases utility. Wintermute CEO Evgeny Gaevoy says Tether risks losing ground if it does not improve operational efficiency. – Link

• The Bellatrix hard fork has just been activate on the Beacon chain and now only the Paris event remains before Ethereum's switch to proof-of-stake. –  Link

• Charles Hoskinson calls Ethereum Classic ‘dead project with no purpose’. Hoskinson has recommended Ergo to proof-of-work proponents saying the coin is "innovating and has a great community." – Link

 BTC (-1.88%) 

Price:

Current price at $19.8K, selling resistance is found at $20K mark while major support appears at $19.7K.Over the week, price ranged from a high of $20.392 to a low of $19,621. 

Metrics:

• BTC spot volume is currently at $5.56B.

• Current Market Cap of BTC is at $385B, which represents a 38.106% of Total Crypto Market Cap.

• BTC volatility: The current, annualized volatility is at 0.50, 0.78% higher than last week.

From last week:

•  📈 Correlations: 

  • 7-Day Correlation:  ETH (0.88)

  • 30-Day Correlation: ETH (0.91)

•  📈 Betas:

  • 7-Day Beta:  ETH (0.66)

  • 30-Day Beta: ETH (0.57)

• News: 

  • Crypto miner Poolin pauses BTC and ETH withdrawals, citing 'liquidity problems' – Link

• Options:

  • BTC’s option profile was evenly distributed this week, with short/mid-term maturities trading the most. The most traded instrument this week was the BTC-30SEP22-18000-P(1.5K)

• Strategies:

  • Investors continue trading bearish strategies such as the Bear Put Spread (2.8K), which benefit from future market downturns, but some consider prices are low enough and as a consequence, strategies such as the Bull Call Spread are gaining momentum.

• IV profile: 

  • 1 Wk ATM 68.3% (avg: 67.9%)

  • 1 Mth ATM 70.3% (avg: 70.3%)

• 25d Skew:

  • 1 Wk 11% (avg: 9%)

  • 1 Mth 15% (avg: 11%)

 ETH (+3.64%) 

Price:

Current price at $1.66K, current selling resistance is found at $1.7K while bullish support takes place at the $1.55K mark. Over the week the price ranged between a weekly high of $1,670 and a low of $1,483. 

Metrics:

• ETH spot volume is currently at $1.27B

• Current Market Cap of ETH is at $193B, which represents a 19.109% of Total Crypto Market Cap

• ETH volatility: The current, annualized volatility is at 0.83, 3.45% lower than last week.

From last week:

•  📈 Correlations: 

  • 7-Day Correlation:  BTC (0.88)

  • 30-Day Correlation: BTC (0.91)

•  📈 Betas:

  • 7-Day Beta:  BTC (1.00)

  • 30-Day Beta: BTC (1.53)

• News: 

  • FTX to halt ETH deposit and withdrawals on Arbitrum, Solana, BSC during the Merge – Link

• Options:

  • ETH’s option profile was reclaimed by the buy side, with options such as the ETH-30DEC22-2500-C (36K) trading the most, followed by ETH-30DEC22-1800-C (15K)

• Strategies:

  • The Bull Call Spread, continued to be the most traded strategy this week at 37K in volume, followed by the Bear Diagonal Spread (Puts).

• IV profile: 

  • 1 Wk ATM 100% (avg: 92%)

  • 1 Mth ATM 100% (avg: 101%)

• 25d Skew:

  • 1 Wk 9% (avg: 6%)

  • 1 Mth 11% (avg: 7%)

 AVAX (+2.60%) 

Price:

Current price at $19.97, selling resistance takes place above the $20.5 range while the closest price support seems to be at $20.00. Over the week the price ranged between a weekly high of $20.28 and a low of $18.43. 

Metrics:

• AVAX spot volume is currently at $4.90M

• Current Market Cap of AVAX is at $5.64B, which represents a 0.558% of Total Crypto Market Cap

• AVAX volatility: The current, annualized volatility is at 0.75, 4.71% lower than last week.

From last week:

•  📈 Correlations: 

  • 7-Day Correlation:  BTC (0.82), ETH (0.87)

  • 30-Day Correlation: BTC (0.78), ETH (0.79)

•  📈 Betas:

  • 7-Day Beta:  BTC (0.07), ETH (0.05)

  • 30-Day Beta: BTC (1.04), ETH (0.68)

• News: 

  • A sharp drop in TVL and DApp use preceded Avalanche’s (AVAX) 16% correction – Link

 SOL (+5.23%) 

Price:

Current price at $32.95, selling resistance seems to occur at $33.50 while price support seems to be found at $32.50. Over the week the price ranged between a weekly high of $33.23 and a low of $30.58. 

Metrics:

• SOL spot volume is currently at $82.71M

• Current Market Cap of SOL is at $11.25B, which represents a 1.093% of Total Crypto Market Cap

• SOL volatility: The current, annualized volatility is at 0.73, 3.03% lower than last week.

From last week:

•  📈 Correlations: 

  • 7-Day Correlation:  BTC (0.88), ETH (0.86)

  • 30-Day Correlation: BTC (0.89), ETH (0.87)

•  📈 Betas:

  • 7-Day Beta:  BTC (1.19), ETH (0.79)

  • 30-Day Beta: BTC (1.26), ETH (0.80)

• News: 

  • Network outages have been Solana’s ‘curse,’ says co-founder– Link

 NEAR (+4.23%) 

Price:

Current price at $4.43, selling resistance is found at $4.50 while price support seems to drive buying action at $4.30. Over the week the price ranged between a weekly high of $4.48 and a low of $3.99. 

Metrics:

• NEAR spot volume is currently at $46.95M

• Current Market Cap of NEAR is at $3.39B, which represents a 0.325% of Total Crypto Market Cap

• NEAR volatility: The current, annualized volatility is at 0.93, 14.93% lower than last week.

From last week:

•  📈 Correlations: 

  • 7-Day Correlation:  BTC (0.74), ETH (0.75)

  • 30-Day Correlation: BTC (0.72), ETH (0.76)

•  📈 Betas:

  • 7-Day Beta:  BTC (0.30), ETH (0.06)

  • 30-Day Beta: BTC (1.43), ETH (0.92)

• News: 

  • NEAR Top News #3 – Link

 ADA (+8.03%) 

Price:

Current price at $0.496, selling resistance at $0.51 while price support seems to be at the $0.48 level. Over the week the price ranged between a weekly high of $0.51 and a low of $0.441. 

Metrics:

• ADA spot volume is currently at $236.214M

• Current Market Cap of ADA is at $17.21B, which represents a 1.648% of Total Crypto Market Cap

• ADA volatility: The current, annualized volatility is at 0.75, 6.23% higher than last week.

From last week:

•  📈 Correlations: 

  • 7-Day Correlation:  BTC (0.56), ETH (0.59)

  • 30-Day Correlation: BTC (0.73), ETH (0.72)

•  📈 Betas:

  • 7-Day Beta:  BTC (0.39), ETH (-0.27)

  • 30-Day Beta: BTC (1.20), ETH (0.70)

• News: 

  • A range-break from Bitcoin could trigger buying in ADA, ATOM, FIL and EOS this week – Link

 MPL (+1.35%) 

Price:

Current price at $18.91, upwards selling resistance seems to be found at $19.50, while bullish action takes place at $18.50. Over the week the price ranged between a weekly high of $19.70 and a low of $17.74. 

Metrics:

• MPL spot volume is currently at $157.29K

• Current Market Cap of MPL is at $120M, which represents a 0.012% of Total Crypto Market Cap

• MPL volatility: The current, annualized volatility is at 1.04, 0.35% higher than last week.

From last week:

•  📈 Correlations: 

  • 7-Day Correlation:  BTC (0.17), ETH (0.11)

  • 30-Day Correlation: BTC (0.18), ETH (0.16)

•  📈 Betas:

  • 7-Day Beta:  BTC (-0.73), ETH (-0.74)

  • 30-Day Beta: BTC (0.82), ETH (0.56)

Upcoming events 

For OTC inquiries, contact laura@ledgerprime.com 

Telegram @lauravidiella or @medianbrain 

For live Altcoin and Options data, join our Ledger Prime Analytics group chat here

The information provided here is not investment, tax, or financial advice and does not reflect LedgerPrime’s official stance on any position. You should consult with a licensed professional for advice concerning your specific situation.

Within the crypto space it’s common to see people fight on Twitter over silly things. In many cases these arguments are a complete waste of time, however, in rare circumstances they present a unique opportunity for individuals to further reinforce their ideas by making public wagers.

A few weeks ago Sensei Algod, an anonymous crypto trader, stirred up some controversy on crypto Twitter by presenting arguments against UST citing it as an “unsustainable ponzi”. To spice things up further, Algod decided to offer a $1M bet that LUNA would be trading lower than the current price a year from now. As a result, Do Kwon, the founder of Terraform Labs, decided to take the other side of this bet. Shortly after several other Twitter profiles also entered the bet with popular crypto personality Cobie setting up a multisig wallet for storing the escrowed funds for the bet which can be viewed here.

The goal of this research is to analyze the structure of this bet and how to think about pricing exposures for Algod and Do Kwon. This piece will be broken down into several parts:

1. Specifics of the bet and understanding payoff structures

2. Evaluating the bet through options pricing

3. Backtesting P&L of systematically trading LUNA binary options

4. Thoughts on the future of the bet

1. Overview of The Bet

The payoff structure for both parties resembles a binary option in which the final result will depend entirely on the price of LUNA at expiration. While binary options are fairly new to crypto, they are actively traded in traditional finance mostly within the FX derivatives market. With this wager, we can think of the bet between Algod and Do as a cash-or-nothing binary option which offers a fixed payout depending on where LUNA is trading at expiration.

Let’s review the exposures for each party in this trade. At the time of the bet LUNA was trading around $88, therefore, we can use this as the strike price which can serve as a benchmark for determining whether LUNA is higher or lower a year from now. Furthermore, this bet was set up as a 50:50 bet with equal cash payouts in either scenario of LUNA being above or below $88 at expiration.

• Do Kwon is effectively long a 1 Year LUNA $88 Strike Binary Call Option which will pay $1M if LUNA is greater than $88 by March 13, 2023

• Algod is effectively long a 1 Year LUNA $88 Strike Binary Put Option which will pay $1M if LUNA is less than $88 by March 13, 2023

2.  Overview of Binary Options and Pricing:

For those familiar with vanilla options under standard Black-Scholes, the formula for binary options pricing will be very similar. In the case of a binary call option, we can generalize and think of N(d2) as the probability of the spot price being greater than strike at maturity and thereby use this to calculate the expected value of the fixed cash payout. A similar approach can be used for determining the fair value of the binary put option.

Similar to vanilla options trading, volatility is the most important variable when pricing out binary options. In the case of this bet, the market already knows the strike price ($88), spot price ($88), time to maturity (1 year) and expected cash payout ($1M USD). For interest rates we can take the median annualized funding rate for LUNA perpetual futures contracts over the past year on FTX which amounts to roughly +1%.

However, traders will have varying opinions on where LUNA volatility may be trading 1 year from now. At the time of this bet, 1 year LUNA realized volatility was trading at ~170%. Currently LUNA has established itself as one of the largest blockchains aside from Ethereum. As such, over the coming year, it’s reasonable to expect LUNA to become more of an institutionalized asset causing its volatility to fall relative to smaller market-capitalization protocols. In this view of the world, it’s reasonable to expect LUNA’s price volatility to be lower than 170% by March 2023.

Given there is no publicly listed options market for LUNA yet, in these cases market-makers will use the ETH volatility surface as a proxy to bootstrap option markets on new assets. A starting point to approximate a fair volatility figure could be to analyze the historical 1 year realized volatility spread between ETH and LUNA as shown below.

We can see the realized volatility spread between LUNA and ETH was at its lowest for the latter half of 2020, ranging between 15 to 35 volatility points. In this case we can use 20 volatility points as an approximation for the spread we’ll add on top of ETH realized volatility to price out these binary options. At the time of the trade, 1 year ETH realized volatility was around 100% so our approximate 1 year LUNA volatility will be 120%. Given these are at-the-money strikes we won’t factor in any skew for the call and put volatility input (if the chosen strikes were farther away from $88 then we’d have to be more mindful of adding some skew for the volatility inputs).

Based on a 120% volatility input and the $88 spot price at inception, for each notional dollar, the value of the binary call at $88 is worth ~$0.30 and the value of the binary put is ~$0.70. However, given the cash payouts for this trade are the same, each party effectively entered into a 50:50 bet where Do bought a binary call for $0.50 and Algod bought a binary put option for $0.50. In other words,  Do effectively “bought” a binary call option for $0.50 but its fair value is worth only $0.30. Furthermore, Algod received the binary put option for $0.50 when it’s theoretically valued at nearly $0.70.

To make this trade “fair” at inception, each leg of the trade should have been valued close to $0.50 per notional dollar. This could have been achieved by varying the inputs of the pricing model as shown below:

• Alternative 1: All else equal from the original bet, adjusting the strike price to $45 instead of $88 would have resulted in both the calls and puts trading for $0.50. Ie:

If LUNA > $45: Do gets paid $1M

If LUNA < $45: Algod gets paid $1M

• Alternative 2: All else equal from the original bet, adjusting the cash payouts for both Algod and Do can help bring the fair value of the options closer to $0.50. In this case Algod’s payout would have to be reduced from $1M to ~$750k and Do’s payout would have to be increased from $1M to ~$2M. ie :

If LUNA > $88: Do gets paid $2M

If LUNA < $88: Algod gets paid $750k

From this analysis we can tell the initial structure of this trade greatly favored Algod, however, this largely depends on the volatility assumed to price the options. Below we can see how the price of these binaries vary when using different volatility figures. Unlike what we observe with vanilla options, a higher volatility figure decreases the value of the call but increases the price of the put. With binary calls, even though the underlying asset price can theoretically go to infinity, the option payoff is limited to the fixed cash payout. As a result, with extremely high volatility even if this increases the probability of outcomes where LUNA is well above the call strike, this is not relevant for binary call options as the payoff would be capped. Rather, due to the nature of the log-normal distribution, extreme volatility would lead to more cases where the price could fall below the call strike, hence reducing the call price and increasing the put price.

As of today based on current market prices, both Algod and Do’s positions are still worth nearly the same since they both entered into this bet. However, we can shock the spot price input to see how the value of the binary call or put changes with respect to changes in LUNA’s price. Currently LUNA is trading for $100 (at the time of writing), however, if it pumped to $175 overnight then Do and Algod’s positions would be worth roughly the same amount.

Overall, to make this trade “fair”, each individual should have adjusted the cash payout and/or strike level to ensure the theoretical values of the binary options are equal at inception. The moral of this story is to never agree to a 50:50 binary bet on altcoins with high volatility until you can determine the fair value of each leg. Although the expected payout may be equal on either side ($1M in this case), because the price can go up exponentially, the probability of LUNA going up also has to be proportionally lower to make the bet fair.

3. Backtesting LUNA Binary Option Trading Strategies

As an aside from the wager, in this section we’ll take some inspiration from the recent success of DeFi option vaults (DOVs) and backtest the historical performance of systematically trading LUNA binary call options. Given the limited price history for LUNA (only goes back since 2019), backtesting a 1 year maturity option strategy won’t provide us with too many data points. Rather, we’ll focus on shorter maturities such as weekly binary options. Furthermore, these short-term strategies may be more relevant for DOVs seeking to provide new products to their users.

Let’s consider a scenario where the trader systematically sells a weekly binary call option with a strike price 20% above the LUNA price at the beginning of the week. Similar to short-dated vanilla options, these binaries are less impacted by volatility but more sensitive to the change in LUNA price. Therefore, we can keep things simple and model the P&L of systematically selling binaries with rolling 30 day volatility less a 15 volatility point spread. We apply this spread to reflect the edge option market-makers would want to capture relative to realized volatility when trading these options with a DOV. Lastly, we’ll specify the fixed cash payout to be $100 if the binary call option expires ITM.

To recap, every week the DOV will sell binary call options with a strike price 20% greater than the spot price of LUNA at the beginning of the week. This should give a sufficient margin of safety in the case of a massive pump in LUNA price (recall the DOV would face a fixed loss of $100 if the price of LUNA was above the strike price at expiry). As shown below this strategy does not generate positive returns as there were over 20 cases where LUNA jumped past the 20% strike threshold on a weekly basis.

We can also flip the model and backtest the P&L of systematically buying these binary call options on a weekly basis. For this backtest we have to add a 15 volatility point premium on top of 30 day realized rolling volatility to reflect the market-maker’s edge. In these cases we can see how the P&L is roughly the inverse of selling the LUNA binary options. There is a fair degree of theta decay from being long the options, however, the occasional periods of LUNA jumping past the call strike does produce a net positive return.

We can smooth out the PNL and improve the return profile for these strategies by including a simple trend signal to filter for ideal trading environments. In this case we’ll overlay a 7 day / 30 day simple moving average (SMA) and use the following logic:

• For call selling, only sell if the trend is bearish (ie: 7 day SMA < 30 day SMA)

• For call buying, only buy if the trend is bullish (ie: 7 day SMA > 30 day SMA)

As shown below adding this simple filter to the systematic call selling greatly improves the overall returns. From a high level this makes sense because the model in theory would avoid selling calls during bullish regimes which reduces the chances of the binary option expiring ITM.

Furthermore, we can apply the similar logic to the call buying strategy. From a quick glance the returns appear to be similar, however, the addition of the trend filter appears to reduce volatility and smoothen out returns.

Lastly, we can take it one step further and combine the buying and selling of digital call options into a single strategy. This smooths out the return profile even further and results in higher overall absolute returns.

In our view as the DeFi options space continues to grow, we expect to see teams include more sophisticated strategies aside from systematically selling vanilla options. While these basic strategies are good starting points to attract users and grow TVL, in the long-run users will demand strategies which provide sustainable returns during changing market conditions. As demonstrated above, in many cases it only takes small adjustments to a naive strategy to drastically improve the overall risk-adjusted returns and thereby offer better yields to users.

Thinking Ahead...

While this research piece does not dive into the LUNA and UST debate we can say that Do is a visionary builder and has created a unique demand for UST aside from purely financial reasons. The growing real-world demand for UST such as with the Chai app in South Korea showcases UST’s competitive advantage compared to existing algorithmic stablecoins. However, at the same time many investors have questioned the reliability of Anchor Protocol’s deposit yield which has been a significant driver for UST growth and subsequently the appreciation of LUNA. If the advertised yield on Anchor were to fall below a certain threshold this could reduce demand for UST to be deposited into Anchor and subsequently cause pressure on LUNA’s price. Furthermore, the price of LUNA is not immune to risk-on events so despite everything else going right on a protocol level, a black-swan macro event could cause LUNA to plummet (alongside the broader crypto market).

Regardless of the outcome in a year, this bet can inspire builders to work on new financial derivatives within the DeFi ecosystem. Furthermore, DOVs may wish to move beyond vanilla options and explore exotic options strategies as demonstrated in the trend-following binary trading strategy. Cega Protocol is a project working on providing DeFi users with sustainable yield by using exotic option structures. We believe projects like these will help push the boundaries of the current DeFi derivatives ecosystem while making it easier for degen traders to make bets like these in the future.

Acknowledgements: Sohan Sen and Shiliang Tang for explaining the mechanics of how binary options work and proof-reading this piece. Bruce Jenkins for discussing the impact of volatility on binary calls and puts. Lastly, Lily Francus for the initial analysis which formed the basis of this research piece.

Disclaimer: Nothing mentioned in this article constitutes as financial advice. LedgerPrime is an investor in Cega. Opinions expressed are solely my own and do not express the views or opinions of LedgerPrime

“The value chain for any given consumer market is divided into three parts: suppliers, distributors, and consumers/users. The best way to make outsize profits in any of these markets is to either gain a horizontal monopoly in one of the three parts or to integrate two of the parts such that you have a competitive advantage in delivering a vertical solution. In the pre-Internet era, the latter depended on controlling distribution.  The fundamental disruption of the Internet has been to turn this dynamic on its head. First, the Internet has free distribution (of digital goods), neutralizing the advantage that pre-Internet distributors leveraged to integrate with suppliers. Secondly, the Internet has made transaction costs zero, making it viable for a distributor to integrate forward with end users/consumers at scale.”

Image from Ben Thompson’s original piece from 2015

We believe the theory deserves a revisit from the lens of someone working in Web3. We have seen behemoths like Ramp, Stripe, and Spotify being built through the collapse in the price of distribution and collecting payments. But how does it apply to Web3 firms? We propose that in addition to collapsing the cost of collecting payments, blockchains can reduce the price of verification and trust. This enables the creation of multi-billion dollar entities that were historically not possible.  The new era of blockchain-based aggregators also helps drive innovation at the protocol layer and enables a new business model: Hyperfinancialization-as-a-Service. 

Collapsing The Cost of Trust 

Much like the internet collapsed the cost of distribution and collection of payments, publicly verifiable blockchains have collapsed the cost of verification and trust. Practically all of the enormous businesses we see in the context of Web3 are built on this principle. Blockchains make it possible for anyone to query and verify if a digital good being sold is genuinely from the source it claims to be. There is no counterparty risk for digital consumption goods like NFTs that are sold through a blockchain-enabled platform because verifying a smart contract ensures you are getting the exact good you are paying for.  

What does this signify for those running aggregators in Web3? It means it costs a fraction of what it does in Web2 to verify and trust vendors when it comes to sales of digital goods. When Netflix or iTunes initially launched, they had to spend months or years negotiating contracts to ensure they could go to market with a large enough inventory of digital goods that would attract users.  Even today, Netflix spends some $16 billion on producing content in-house based on their users’ data. As the size of these aggregators scaled, they became the best place for digital consumption goods to be sold. After a decade’s worth of work, owning the distribution gives them that advantage.  

Some interactions are not possible in Web2 aggregators because of the inherent friction introduced by siloed databases and data that is not open. For example, you cannot browse for property listings through Zillow, and subsequently, make an offer on it and move on to refinancing the asset all within the same platform. You would have to go to another venue like Figure and run through their various compliance and onboarding procedures that are unique to each platform.  It also makes it much harder and more expensive for developers of other applications to easily tap into your aggregation and build new interesting services on top. 

On-chain identity, data, and verification standards can solve for this, and enable Web3 aggregators to be much more efficient than their Web2 counterparts.  In stark contrast, OpenSea does not spend much worrying about the licenses. They can almost instantaneously verify that a third party’s NFT comes from a legitimate source and track how it moves across its userbase. What about Uniswap? So long as the user accurately adds the token’s address, there is no need for human involvement in verifying if a token being traded on it is legitimate.

Web3 is interesting because it changes the unit economics of verification and trust. Historically, aggregators would acquire intellectual property rights for the most desirable digital consumables. As we will see in a piece soon, in emerging markets like India, holding the streaming rights for Cricket paved the way for television networks to scale. Blockchains have enabled platforms to prove provenance and authority of issuance from anyone on the web at a fraction of the cost.  This means the expenses incurred in legal fees and time spent through bureaucracy is now replaced with on-chain verification, identity, and verification. This principle will be at the crux of what makes aggregators in Web3 massively influential. Don’t believe me? Let’s look at some of the aggregators within the ecosystem today and how they use blockchains to their benefit.

Aggregation in DeFi

Zerion is a wallet interface focused on enabling users to track their portfolios. The product currently tracks NFTs, allows swaps, and gives users a look at how all the tokens in their wallets are performing. Interfaces like those offered by Zerion are quickly becoming the “home page” for DeFi. They allow users to interact with a complex host of apps without going outside the interface of a single website. In addition, these interfaces eliminate the high risks of phishing, losing keys, and signing the wrong smart contracts by allowing users to interact with them directly through their interface. They help users access functions like lending through curating protocols and also drive innovation at the protocol layer by offering more choices to customers that offer them competitive pricing and features. It would be safe to suggest that assets worth a few billion dollars are managed through Zerion’s interface. 

How much of that risk is with Zerion? None. They don’t custody the assets and they don’t manage the smart contracts. Instead, they are responsible for embedding each of these protocols into the product to create a super-app. According to a recent press release, they interface with some 50,000 assets across 60 protocols. Comparables like DeBank, Frontier and ImTrust have been at the forefront of enabling more retail participants to find their way around the complex Web3 ecosystem. 

How? They reduce the trust barrier required to use an app as an end-user assumes that the interface creators have already exercised due diligence. Secondly, they enable new apps to be discovered far more smoothly than through complex web of information platforms like Twitter. Lastly, and most importantly, they combine the ability to club multiple DeFi DApps in a single interface. They have also begun integrating on-ramps and tax software as users’ needs in the industry evolve. 

I have taken Zerion as an example here as it is a centralized entity that acts as an interface to plugin with multiple DeFi DApps. However, aggregation in DeFi runs beyond that. Here are some examples :

Orderflow - 1inch and Matcha.xyz allow users to find the best price for assets that need to be traded without going to individual platforms. They do not custody the assets used for trading themselves but seek liquidity from third-party platforms. Matcha has taken this one step further by integrating a request for quote model in the product. They have done about $42 billion in cumulative volume across ±900k orders so far. This feature allows centralized market-makers in the back end to quote prices for large order sizes, thereby bringing the experience closer to what a centralized exchange like Binance can offer.

Yield - The holy grail for DeFi has historically been the ability to provide yield. The large risk lending or decentralized exchange platforms have is potentially getting hacked. But what if you could build interfaces that allow users to deploy capital in pools while not necessarily holding the assets yourself? Rari, Alpaca and Yearn Finance do just that. Rari alone has deployed $922 million through Fuse pools for a sense of scale. Instadapp takes this one step further with its user experience. The product allows users to manage debt positions or deploy assets into yield-bearing pools using a single interface. They manage around $5 billion worth of assets across the likes of Maker, Compound and Aave through their interface. 

Aggregation of The Metaverse

Chart source : Gem Master Dashboard by @bakabhai993

NFTs are interesting from the point of view of aggregation. You have a digital good with transaction finality and on-chain provenance of intellectual property. Please don’t curse me. I will explain it without the jargon. Given that users cannot reverse blockchain transactions, a user buying an NFT almost certainly does not have to worry about losing what they purchased to fraud unless the NFT itself is a duplicate.

They can also verify that it is coming from the right source almost instantaneously. Unlike traditional art markets, you can almost instantly see what the floor price of an NFT is and who its past owners were. These make NFT aggregators incredibly powerful in terms of how they can interact with market participants. 

Consider Gem, for instance. The aggregator itself holds none of the NFTs listed on the platform. They use Dune to give analytics to their users. Once you click on a collection, the interface allows you to bid on listings directly in Opensea and LooksRare. Now, this is where this gets even more interesting. Aggregators like Gem become the place for price discovery as users are essentially discovering and tracking their portfolios and bidding through them.

In the future, they’ll also cover features that blur the lines between DeFi and NFTs through lending and automated inventory management. The traditional art or physical market has some of the previously mentioned constraints relevant to Web2 aggregators that prevent them from offering these services at low friction and cost. In addition, some of the other verticals like Gaming and Metaverse do not even have historical analogs - Web3 aggregators will be the first to support and enable efficient markets in those categories of digital assets.

Over time, they can be influential enough to determine which NFT set gets “discovered” as essentially what they are accruing is the market’s attention. How much is that attention worth? I don’t know yet, but it is valuable enough to have driven $400 million in volume through the platform alone. Gem is also influencing the market share of the underlying NFT marketplaces themselves. Because users are marketplace agnostic and will buy and sell assets wherever there is a favorable bid/ask. For example, LooksRare’s market share on NFT volumes went up in relation to OpenSea since gem was launched.

The Next Decade of Aggregation

Let's revisit the core argument of this piece before we wrap up. We believe that blockchains will enable an entirely new category of markets that are able to verify on-chain events instantaneously. This will collapse the cost of validating intellectual property at a massive scale and thereby create new business models. Present-day Web3 aggregators provide interfaces that show on-chain data and allow users to interact with smart contracts from multiple platforms. They don't own the risk of custodying these assets and typically do not bear exponentially higher costs for supporting additional networks. Covalent and Nansen are able to generate exponential value by adding each new chain - which is usually a linear expense.

The core proposition of Web3 aggregation over the next decade will be in streamlining large, messy processes with multiple counterparties in systems with low trust. One instance of this occurring has been AngelList. The platform has structurally collapsed the amount of friction involved in putting together a venture round by combining legal, banking, and LP management in a single interface. How much is that worth? Around $4 billion as per their latest round. Large, messy markets with multiple moving parts are hard to aggregate at scale unless you have time or capital. AngelList took roughly 8 years to build its monopoly, while Uber had to raise some $25.5 billion to become today's behemoth. I believe blockchains will collapse the unit economics around this and hyper-financialise the process. Clubbing the eradication of inefficiencies in what have historically been long, chaotic processes with incentives that allow people to profit from them can be a powerful mix.

We are uniquely positioned at LedgerPrime to detect aggregation early on. As a market-maker, we often see new aggregation categories emerge. We were early to deploy money in option vaults, staking ventures, and more recently in the rapid financialization of the NFT ecosystem. As capital allocators, there is a delicate balance between enabling a new ecosystem and empowering ventures that aggregate a sector. Part of the reason why we have been able to strike that balance right is our involvement from being early investors and our ability to see an organization through to its late stages where a venture becomes dominant enough to become the aggregator. In a follow-on piece, we will be exploring the growth stages of some of our portfolio companies and how the theory has been applicable to them. Stay tuned. 

Note: This article was written with inputs from Krishna Sriram, Head of Business Development at Quantstamp. 

It may sound strange but crypto investors aren’t much different from traditional finance investors. While both parties have varying degrees of risk tolerance, one key similarity between crypto and traditional investors is their insatiable thirst for yield. To achieve this goal, a traditional investor might buy high dividend paying stocks, purchase income-generating real estate, or even trade bespoke OTC yield-enhanced notes.

Similarly, many crypto investors achieve their yield objectives through a variety of strategies including lending on decentralized money-markets, staking a protocol’s native token, or collecting trading fees by depositing passive liquidity into an automated market-maker.

Over the past few months DeFi ecosystems across different blockchains have witnessed a massive surge in new projects focused on structured product vaults with the objective of offering users sustainable yield. In their current form, these structured product vaults are selling fully collateralized call and put options in exchange for the premium. Given the infancy of these products, we wanted to perform an in-depth quantitative analysis showcasing the expected performance of these vaults and some thoughts on the future of this space. This research note will be organized as follows:

• Part 1: Summary of DeFi Option Vault Ecosystem

• Part 2: Historical Backtested Performance of ETH Covered Call Vault

• Part 3: Historical Backtested Performance of SOL Covered Call Vault

• Part 4: Thoughts on the Future of DeFi Option Vaults

Part 1: Overview of DeFi Option Vault Ecosystem

Since the beginning of 2021, the DeFi eco-system has witnessed an explosion in activity related to decentralized options and structured products. As shown below, the total value locked (TVL) across DeFi option protocols has gone from several million dollars in late 2020 to nearly $1B at the beginning of this year. This pace of growth is expected to continue as we see new option projects continue to build innovative solutions for users to earn yield.

Across all of these platforms, an overwhelming majority of the DeFi option vault strategies revolve around selling fully collateralized call options. This is a popular strategy used by both traditional and crypto investors seeking to earn additional yield on their idle assets. Let’s briefly review the mechanics of selling fully collateralized calls (ie: covered calls):

• An investor will own the underlying crypto and sell a call option with a strike at or above the current crypto price. In exchange for selling this option in the market, the investor will receive a premium.
  

• The act of selling a call option against spot holdings effectively caps the upside price exposure of the asset. Specifically, if the underlying asset were to skyrocket past the call option’s strike, the investor’s USD profit would be limited to: strike price - spot price + call option premium received. Below is a visual representation of how a covered call option is structured (PNL is in USD):

The risk of this strategy can be broken down into two components:

• Downside Risk: the investor is still exposed to the underlying crypto falling in price, however, this is partially reduced by the option premium collected.

• Upside Risk: if the price of the underlying crypto were to massively skyrocket in value, the investor’s USD PNL would remain capped. Therefore, the investor would have incurred an opportunity cost of making higher returns by just holding the underlying asset.

• From purely a yield perspective, the best case scenario is for the underlying asset to expire just below the call option’s strike price. In this case the call option will expire worthless and the investor will be able to keep 100% of the option premium initially sold.

With this context we can now move to modelling the historical performance of systematically selling covered calls on a variety of different cryptocurrencies.

Part 2: Historical Backtested Performance of ETH Covered Call Option Vault

ETH is one of the most popular assets on DeFi option platforms regardless of the underlying project’s blockchain. Let’s start by modelling out a backtest for systematically selling fully collateralized ETH calls and analyze the performance over time. The logic will be as follows:

• Every week the model will look at historical Deribit data and sell 1 ETH call option closest to 10 delta. A majority of DeFi option protocols such as Friktion, ThetaNuts, Katana, Ribbon Finance, and Chest Finance generate yield for their users by systematically selling deep OTM call options around 10-15 delta. In the case of Ribbon Finance we can compare the protocol’s historical ETH trades to similar options on Deribit at the time of auction and use these respective deltas for comparison purposes.

• We’ll assume the option is sold at 90% of the top of the book bid ETH price based on historical Deribit data (a 10% discount was applied to account for the sensitivity associated with small orders disproportionately impacting top of the book prices). In practice option market-makers will likely bid lower than this given they have to make it worthwhile for warehousing the option risk on-chain without being able to benefit from any cross-margining on centralized exchanges.  

• Similar to all the DeFi option vaults we’ll hold the options until maturity. At expiry there are two potential outcomes:

a) The call option will either expire OTM (strike < spot) in which the seller of the option keeps 100% of the option premium sold.

b) The call option will expire ITM (strike > spot) in which the seller will face an ETH loss of (spot - strike) / spot.

• It’s important to note the maximum gain in a covered call trade is the option premium received. Furthermore, the most an investor can lose in a single trade is his entire ETH collateral position.

• All of the options sold are fully collateralized based on the seller’s ETH equity. For example, at the beginning of the backtest we start with 1 ETH, therefore only 1 ETH call option would be sold. However, after several trades if the account equity is now 0.90 ETH, then the seller would short only 0.9x worth of ETH call options. This process allows us to compute the compounded returns of the strategy across the entire backtest.
  

If an investor started with 1 ETH and systematically sold weekly 10 delta ETH call options with the methodology described above, he would have returned roughly -0.25 ETH over this time period. Recall covered call selling typically does well during choppy or bearish environments as the spot price has less of a chance of breaching the call strike. Therefore, these results are in line with what we’d expect given the past 2.5 years have been exceptionally strong for ETH.

As can be seen above, this strategy faced a significant loss in early 2021. At that time, the model was short the $880 strike call option, however, ETH jumped from $740 to nearly $1200 within less than a week causing the option to be ITM by nearly $320 or 0.27 ETH. Although these major shocks tend to be infrequent, it only takes a single black-swan event like this to significantly erode the strategy’s profitability.

Another way to visualize the behaviour of these extreme events is to analyze the ETH price / option strike ratio. Whenever this ratio is greater than 1 it indicates the sold call option is ITM whereas less than 1 indicates the option is OTM. Based on the charts below it’s interesting to note there aren’t many observations above 1, however, just a handful of exceptional tail-events are the primary root cause for the significant underperformance of this strategy.

When comparing from a USD denomination, the results are slightly better, however, holding spot ETH still massively outperforms the covered call strategy. Specifically, holding ETH would have returned 1860% whereas the covered call would have returned 1430%, resulting in relative underperformance of nearly 400%.

Overall, despite earning yield on ETH, these results suggest that investors are better off just holding spot ETH rather than systematically selling deep OTM weekly call options.

Part 3: Historical Backtested Performance of SOL Covered Call Option Vault

Over the past several months LedgerPrime’s trading desk has seen considerable growth in terms of OTC altcoin options volume. In particular, Solana is one of the most popular underlyings for options outside of BTC and ETH, therefore, we’ll focus on modelling a vault strategy for this altcoin.

Currently there isn’t a reliable venue to retrieve historical SOL options data, therefore, we will have to bootstrap our own option prices. The approach will be as follows:

• Calculate the rolling 14 day close-close volatility for SOL using daily price data.

• Apply a 10 volatility point discount from the realized volatility and use this adjusted volatility to determine the strike of a 10 delta option (see appendix for technical explanation). With these parameters we can use Black-Scholes to calculate the price of the call option premium.

• We’ll use the same account equity calculations as discussed above with the ETH backtest (ie: user begins with 1 SOL and compounds his position for every trade). The model will hold onto the option until it expires.

• A key limitation of this approach is it fails to incorporate the volatility skew for a deep OTM option. Once a robust market for SOL options begins to trade, we can use the historical data from that venue and backtest this more accurately.

Unfortunately, the covered SOL strategy faced significant coin-denominated losses across the two year backtest period. A user starting with 1 SOL would only have roughly 0.30 SOL left from this strategy. Additionally, similar to before, while the USD returns for the strategy on their own are impressive (~4,000% ROI), it massively underperformed just holding spot SOL (~14,700% ROI). In other words, there’s an opportunity cost of nearly 10,000% for trading SOL covered calls rather than simply holding spot SOL!

The massive underperformance is due to SOL’s exponential price rise over the past 2 years. As can be seen below, anytime there was a massive jump in SOL’s price, this was associated with a declining SOL equity balance, similar to what we saw with the ETH backtest.  

We can also look at the SOL price / strike ratio which is used to determine the magnitude of how deep ITM the SOL options can get. Relative to the ETH backtest, we can clearly see there’s more instances of the ratio being greater than 1. This indicates the SOL call strike was breached more often and with a higher magnitude. Overall, from a purely absolute return standpoint it would have made sense just to hold spot SOL rather than systematically sell calls on a weekly basis.

Part 4: Final Thoughts and Conclusion

As shown with the ETH and SOL backtests from above, if an investor is extremely bullish on the short to medium term of an asset it would be wise for them to refrain from selling calls against their spot holdings. Covered call selling during bullish regimes may still generate a decent return in USD terms, however, it’s likely this strategy will significantly underperform relative to just holding the underlying asset. This is because during extreme bullish periods when a coin pumps there’s a higher probability the spot price will rise past the call strike and result in losses.

It’s crucial for investors to understand that selling option premium is not a guaranteed form of passive income. Similar to how liquidity providers on automated market-makers (AMMs) encounter impermanent loss during significant market volatility, investors selling options are exposed to a similar type of opportunity cost. Let’s review the comparison below:

• AMM: An investor will earn fees by depositing funds into a liquidity pool (LP). The LP position will be exposed to higher impermanent loss from pools with volatile pairs. In case of a massive price shock in either of the pool tokens, an investor will likely not earn enough from the liquidity provisioning fees to cover the impermanent loss, hence they’d be better off just holding the underlying asset.
  

• Covered Calls: An investor will collect premium by selling options against a fully collateralized position. In this case the investor is exposed to the price of the underlying asset jumping past the call strike, hence, resulting in coin-denominated losses. As an example, when looking at returns from a USD perspective, the ETH investor faced an opportunity cost of nearly 430% if he had just held onto spot ETH rather than selling covered calls.

While many of the insights from this research piece may be dismissive of selling calls for yield this is not the conclusion we want to convey. In many cases selling covered calls is an excellent strategy used by sophisticated investors and institutions. The key difference, however, is these parties don’t systematically sell the same weekly deep OTM covered calls, rather they analyze the market and have more discretion on which option type, strike, and maturity to trade.

With that being said, DeFi option vaults are still in their initial stages of development and there is still tremendous opportunity for these projects to allow for more flexibility on the underlying structured products. As a path forward, builders could create aggregators for these structured products which can allow strategists to mix-and-match option vaults across different platforms. This can result in tailored strategies which are more robust and sustainable in the long-run.

Overall, investors in crypto need a source of yield which does not depend on unsustainable token emissions and ideally is not correlated to general market moves. Option vaults are one of the few solutions offering users yield which is supported by professional market-makers and hence is more sustainable in the long-run. Lastly, DeFi option vaults will likely gain more adoption once projects launch vaults with more sophisticated strategies and allow for greater flexibility.

Acknowledgements: Ken Chan for explaining the mechanics of how weekly option vaults work on Ribbon Finance and sharing his feedback on the historical backtest simulations.  

Disclaimer: Nothing mentioned in this article constitutes as financial advice. LedgerPrime is an investor in Friktion and ThetaNuts. Opinions expressed are solely my own and do not express the views or opinions of LedgerPrime.

Appendix

Reverse-Engineer Option Strike Using Delta: The following formula below was adapted from Espen Haug’s book “The Complete Guide to Option Pricing Formulas.” Given we have to manually create hypothetical SOL options near 10 delta, this formula can help us determine the strike price which will allow us to calculate the option premium.

At the same time there’s been a lot of buzz lately about the launch of the world’s first regulated BTC ETFs debuting in the US. If many of the pundit’s predictions are true and BTC reaches $1M in several years, then it’d be an incredible opportunity to buy one of these ETFs inside a tax-free investment account such as a TFSA or Roth IRA. Buying the ETF abstracts away a lot of the headaches and complexities involved with manually storing BTC in a hardware wallet.

Although this seems like a great choice, it’s worthwhile to take a second look at these newly issued BTC ETFs — there’s more than meets the eye and careful analysis is required to ensure investors choose the right product for their given needs.

This research piece is broken down into three parts. For those already familiar with futures please feel free to skip to part 3.

• Part 1: Differentiate between futures ETFs vs synthetic ETFs

• Part 2: Provide a brief summary on how futures contracts work

• Part 3: Model the return profile of a futures ETF vs holding actual BTC

Part 1: Physical vs. Synthetic ETFs

With over $9 trillion in global ETF assets under management, it’s an understatement to say that ETFs have been successful in main-stream adoption. Many retail and institutional investors like ETFs due to their simplicity of gaining exposure to a particular market in a passive manner. Rather than buying 500 individual stocks of the S&P 500 index, investors can simply purchase the SPY ETF to gain the same exposure. There are generally two types of ETFs which we’ll discuss below:

• Physical ETF: these ETFs contain the actual underlying asset. For example, GLD is the ticker for SPDR Gold Shares which provides investors with exposure to real gold stored in HSBC’s London vault. Below we can see the GLD trust holds nearly 31 million ounces of gold backing the ETF.

• Synthetic ETF: these ETFs don’t actually contain the underlying asset, rather investors are given exposure to the underlying through financial derivatives. These ETFs provide less sophisticated investors with exposure to more exotic markets which they would otherwise not be able to access. For example, USO is the ticker for the United States Oil ETF. As shown below, this ETF doesn’t actually hold real oil, rather, it is constructed using a portfolio of WTI Crude Oil Futures.

Given BITO was the first Bitcoin ETF to hit the market we’ll focus on this product throughout this piece. Firstly, let’s take a look at the description of BITO on the ProShares website:

Interestingly, BITO doesn’t have a single dollar’s worth of actual BTC in the ETF. Rather, BITO and all of the newly issued ETFs over the past few weeks fall under the category of synthetic ETFs where they buy CME BTC futures contracts.

Before we proceed further it’s necessary to briefly review futures contracts in order to appreciate the consequences of investing in a synthetic ETF composed of futures.

Part 2: Overview of Futures Contracts

Futures are financial instruments used by companies, financial institutions, and traders for a variety of speculative and hedging purposes over a fixed period of time. Similar to options, futures contracts derive their value from the underlying asset price and also have a predetermined maturity.

There are three important points to know about futures:

• Many people trade futures over the actual underlying asset because of the amount of leverage they can utilize. For example, an investor can open a $100k futures position with only $10k worth of initial margin. This is a much more capital efficient way for sophisticated players to trade the underlying asset.

• Traditional futures contracts have fixed maturities. This means an investor seeking continuous exposure to a particular asset must constantly purchase new futures as they expire (we refer to this as “rolling” into new contracts).

• Futures prices often differ from the actual underlying asset price. When the futures price is greater than the underlying price this is referred to as contango. Conversely, when the futures price is less than the underlying price this is referred to as backwardation. Most importantly, when a futures contract expires its price will be the same as the current spot price of the underlying asset. For example, a BTC futures contract with 5 days left to maturity might be trading at $60,100 while spot BTC might be trading at $60,000. If all else remains the same, then the $100 difference will eventually decay to zero as this futures contract expires.

Let’s consider a few examples to fully understand contango and backwardation. Assume the current spot price of BTC is $60,000 (this is the price at which an investor can trade BTC in the open market).

Scenario A:

BTC December 31, 2021 Futures Contract Price: $65,000. This is the price of the BTC futures contract which expires on December 31, 2021. In this case the difference between the spot and futures price of +$5,000 is referred to as the basis. When the basis is positive, traders refer to this as the market being in contango. This basis will eventually converge to zero as we get closer to the December 31, 2021 expiry date. In an efficient market, the basis should simply reflect the cost of carry and shouldn't provide too much insight on market sentiment. However, crypto is an inefficient market and it's still difficult for investors to gain exposure to leverage in a regulated manner. Given these unique circumstances, in this market the basis can be more heavily relied on to understand the market's overall sentiment.

Scenario B:

BTC December 31, 2021 Futures Contract Price: $57,000. Similar to the above case, this future will expire on December 31, 2021, however, the basis is now -$3,000. When the basis is negative we refer to this as backwardation. This is less common and occurs when markets are stressed and investors are bearish on the future price of an asset. Similar to above, generally when investors are bearish this causes the futures price to fall below spot, hence resulting in a negative basis. Recall it’s easier to understand the impact of the basis effect in crypto given the market is still growing (the basis in traditional markets wouldn’t provide as much insight into market sentiment).

At this point one might think — why would the price of futures be different from spot? The main reason is investors have directional views on the underlying asset and will use futures to make their bets. If a lot of investors are extremely bullish on BTC,  then their collective buying pressure would bid up the futures contract price well above the current spot price resulting in a positive basis. Conversely, if investors have a negative outlook on BTC, then they’re likely to sell more of the futures contracts which could cause its price to be lower than spot resulting in a negative basis.

With this context we can now dive into modelling the BTC futures ETF.

Part 3: Modelling Hypothetical Futures ETF Performance

At this point we should understand that BITO and all the other BTC ETFs launched a few weeks ago are synthetic and not physically backed by real BTC. As a result, this will lead to differences in the return profile between holding real BTC vs holding a futures based ETF. In the BITO summary prospectus there’s a risk disclaimer warning investors of this very issue.

The entire purpose of building a quantitative model is to investigate the last sentence of the disclaimer — “these differences could be significant.” We will actually quantify the difference between holding spot BTC vs investing in a BTC futures ETF through a backtest as will be explained below:

Suppose an investor has $100,000 and is thinking about the following options:

1. Buy $100,000 worth of real BTC at the current spot price

2. Buy $100,000 worth of a futures-based ETF

A simple way to check which option is better would be to track how much the initial $100,000 grows over several years in either scenario. Unfortunately, all of these BTC futures-based ETFs were only launched several weeks ago, therefore, we do not have sufficient data to make a direct comparison over the long-run. However, BTC futures trading on the Chicago Mercantile Exchange (CME) has existed since early 2018, so we should be able to use this data to replicate the historical performance of a futures-based ETF across time.

BITO and other related ETFs hold CME BTC futures with roughly 1-2 months to maturity. To keep things simple in our model we will buy the one month BTC futures contract, hold it to maturity, and then reinvest our capital into the next one month futures contract. This process of rolling into monthly futures contracts will be repeated for the duration of this analysis.

As each CME contract expires, we will roll into a new futures contract and repeat the process. The goal here is to compare the returns from rolling into futures relative to just holding spot BTC.

Over the course of nearly 4 years we can see the difference between the two options is quite apparent. At the end of the backtest, if the investor held onto spot BTC he would have a portfolio value nearly 30% greater compared to holding the futures ETF.

Furthermore, we can also run some investment statistics over this backtest period. Across nearly every metric, holding spot BTC is superior over the futures ETF.

What causes this behaviour and why does the futures ETF underperform by such a wide margin? This will be best explained with yet another example.

With the first option of buying at spot, (at the start of the backtest on 2018-03-30) suppose the investor bought $100,000 worth of BTC at $6,785 giving him 14.74 BTC worth of exposure. This quantity remains fixed throughout the backtest — he will always be exposed to 14.74 units of BTC if he just buys and holds real BTC.

Under the second option, at inception the investor purchases $100,000 worth of CME BTCJ8 (ie: April) futures at a price of $7,105 giving him exposure to 14.08 BTC. He will hold this position until the futures contract expires on April 27, 2018. Upon expiration he will close this futures position by selling at the close price of $9,223 per contract resulting in a portfolio balance of roughly $130,000. From here the investor would allocate his entire balance of $130,000 into the CME BTCK8 future (ie: May futures) at the contract’s price of $9,241 giving him now exposure to nearly 14.05 BTC (ie: $130,000 / $9,241 ≈ 14.05 BTC). The investor will have to continue this same process on a monthly basis.

A few important points to highlight:

• With the first option of buying spot BTC, the investor’s exposure to BTC will always remain fixed at 14.74 BTC. Conversely, by rolling into CME futures the investor’s BTC exposure will constantly be changing every time a trade is made. This is largely explained by the fact that futures contracts have basis embedded into their prices. If there was no basis baked into the futures prices, then by definition trading the futures would be equivalent to trading spot.

• As discussed earlier, during periods of contango the futures prices will be greater than spot. On a relative basis, this will result in the investor receiving less BTC than if he had just bought spot BTC (ie: buying $100k worth of BTC at spot for $60k vs buying $100k of BTC futures at $65k — in this case the investor receives more BTC by purchasing at spot). Conversely, during periods of backwardation where futures prices are less than spot, the investor will accumulate more BTC than if he had just bought spot (ie: buy $100k of BTC at spot for $60k vs buy $100k of BTC futures at $55k — in this case the investor receives more with the futures).

• With the futures ETF the investor is able to increase his notional exposure to BTC during periods of backwardation because the futures price is below the spot price. As a result, in bull markets when the basis is in contango, the futures ETF will by design gradually lower its notional exposure to BTC.

• Below is a chart highlighting how the investor’s notional exposure to BTC under the futures approach changes over time. Given this backtest began in the midst of a bear market, the period up to July 2019 resulted in a growing BTC notional exposure due to the negative basis during this time. However, notice in late 2019 as the bull-market began, the BTC notional exposure gradually declined due to the positive basis from the futures term structure.

• As mentioned above, the only case where the futures ETF would be able to accumulate more BTC exposure is if the futures term structure is consistently in backwardation where the basis is negative, however, these periods tend to be quite rare. The histogram below showcases the 1 month annualized basis for BTC CME futures since August 2020 - notice how the basis is almost always greater than zero. This largely explains why the futures ETF would fail to keep up with spot BTC in the recent bull market. 

  

Concluding Thoughts

While most of this analysis has been critical of the new BTC futures ETFs, there are some niche use-cases where this product may be useful. Given the futures-based BTC ETFs underperform in the long-run relative to spot, these products are likely best suited for active retail traders who don’t have access to futures markets but wish to make short-term directional bets. Furthermore, due to regulatory or fund mandate constraints, many investors are not able to participate in BTC futures trading. With the introduction of these ETFs regulated under the SEC, these investors have a new product for gaining exposure to BTC.

Personally, I find it surprising as to why US regulators haven’t approved a physical BTC ETF yet. As demonstrated in the modelling analysis, holding spot BTC through a physically based ETF would be much better for both retail and institutional investors over longer periods of time. Most of the hesitancy from the SEC is due to their concern on how the BTC would be securely stored and protected with custodians. Once further clarity and solutions are brought forth by the industry, I believe the SEC will have fewer reasons to not approve a physically backed ETF.

Overall, while it was interesting to witness the debut of the world’s first US regulated BTC ETFs, it’s difficult to see how these futures-based products can sustain their market share as physically backed ETFs come to the market. Until a viable physical ETF product is available, investors seeking to gain exposure to BTC are better off taking the time to learn more about hardware wallets and security. Ironically, this process will likely instil a greater appreciation for the core ethos of crypto and perhaps these investors won’t even end up investing in the physical ETF but rather choose to self-custody.

Acknowledgements: Shiliang Tang for explaining the mechanics of rolling futures in a systematic manner and providing valuable feedback throughout the modelling process. Bruce Jenkins for providing useful comments pertaining to the futures term structure and proof-reading this research piece. And lastly, Greg Magadini for providing helpful insights on the futures basis and sharing ideas on how to work with futures data.

Disclaimer: Nothing mentioned in this article constitutes as financial advice. Opinions expressed are solely my own and do not express the views or opinions of LedgerPrime.