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  • Ben Upward

We got a great note from a very successful individual trader last month. She posited that the inability of bitcoin and digital assets to rally in the face of a) the Canadian government blocking/confiscating private fundraising efforts, b) the Russia-Ukraine conflict and the corresponding sovereign-level fiat-denominated asset seizure phenomenon (cutting Russia out of the SWIFT system), and c) a huge Miami crypto conference meant that, together with a weak looking chart, bitcoin could be heading to $30k.


She nailed it.


But now that we've hit $30k in BTCUSD, where do we go from here?


Let's leave narrative and fundamentals to the side (for today) and just concentrate on price for now. Below is a Gemini exchange BTCUSD daily semi-log chart from tradingview:


  • Top panel

  • Daily price candles - red and green

  • Current 200-day moving average as of 10am, May 11, is $45,941 - solid light green line

  • Bottom panel

  • The BTCUSD price divided by its 200-day moving average - solid blue line

  • Current level -32% - price is trading 32% below its 200-day moving average

  • Horizontal green dashed line at -40%, previous hits on that line highlighted by the vertical light blue dashed lines





  • That 40% below the 200-day moving average is within sight. Right now that level would be ($45,941 x [1-0.40]) = $27,564.

  • If you squint at the bottom middle of the chart, you can see in December of 2018 (end of Crypto Winter), we spent a few weeks below -40% - and I think we spent say ~1 day below -40% on March 12, 2020 (beginning of US lockdowns).

  • The low of those periods was a very brief -50% - right now that would translate into roughly ($45,941 x [1-0.50]) = $22,970.


This tool is a blunt indicator, not necessarily a timing trigger - it is telling us there should be significant support not too far from current levels. We value this indicator but like to consider multiple studies to build a more robust opinion.


We can look at classic support/resistance and trend lines:





We can look for any momentum divergences (using RSI vs price):




  • Top panel

  • Lower lows in price both YTD and over the past month or so (downward sloping orange arrows)

  • Bottom 2 panels

  • YTD - momentum with a positive divergence, higher lows (green dashed arrows)

  • Recently - still making lower lows (downward sloping orange arrows) - in a perfect world, we need those arrows to turn green so momentum makes higher lows across this shorter time frame

There is enough momentum divergence to make a case that conditions are there for a meaningful bounce, but we'd like to see the shorter time frame confirm that with higher lows in momentum to increase the odds that indeed a move up off these lows is possible.


...


And we are finally getting a glimmer of strength in price from the blockchain-related publicly traded equities (represented here by the BLOK ETF) relative to BTCUSD to confirm the momentum divergence we've seen on the chart below (higher lows in momentum vs lower lows in price). Some times blockchain-related equities can lead the coins. That being said, BLOK does contain some constituent stocks that do not have pure digital asset beta (and are therefore typically less volatile) - we would still like some of the former bellwethers like COIN, MARA, and even MSTR (although MSTR is a little bit in its own category as a potential target for hedge funds to short in the near-term) to find some sort of near-term support on an individual basis - this has not yet happened.





How about a simple indicator to add to the rest of our study - Bollinger Bands - a measure of standard deviation calculated around a 20-day moving average - this tool can sometimes point out when price is stretched.



  • Top panel

  • The red line is the top band representing 2 standard deviations above the 20-day moving average

  • The green line is the bottom band representing 2 standard deviations below the 20-day moving average

  • Bottom panel ('% B')

  • If the green line is above 1.0, then price is through the upper Bollinger band

  • If the green line is below 0.0, then price is below the lower Bollinger band

  • The pink dashed horizontal line shows the Monday (5/9/2022) low in % B at -28% below the lower Bollinger band

  • The vertical blue dotted lines highlight the 5 previous times price has been that far below the lower Bollinger band

  • the 1st two vertical lines on the left occurred in Q4 of 2018 after bitcoin broke down out of an incredibly tight consolidation range - in this quarter, the extreme negative %B readings actually preceded a large sell-off instead of indicating the end of one...

  • the Sep 2019 vertical line and corresponding negative %B represented a temporary, but meaningful, pause in selling

  • the final two vertical lines, March and September of 2020 resulted in tradeable bottoms

Here is a closeup of this week's negative % B reading:





Conclusion:


We are not calling a bottom - we are trying to take a fresh, analytical (non-emotional) look at price. So, narratives and on-chain metrics aside, the technical picture is showing an oversold market currently entering a price zone ($27-29k in bitcoin) that could contain fairly robust support. On a day-to-day basis, or hour-to-hour (since these are digital assets we are talking about!) basis, there could be significant under-shooting of support zones due to more forced liquidations. There are other factors to take into account that we have not gone into here (like on-chain metrics, funding rates, futures positioning, narratives/fundamentals) which will may have a large impact on the short-term picture - but the charts above suggest there are some reasons to start thinking about putting some money to work in the space if you have a long-term (years) time horizon...and a strong stomach...:)


Please do your own research, this is not investment advice.

Chart details, time stamps, etc. are in the body of the charts.


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  • Ben Upward

A quick note on our experience this month trading the newly listed CME BTC and ETH micro futures options. We may write a larger piece or possibly a series of smaller posts laying out the time line of CME cryptocurrency products and where they fit in the broader, global crypto derivatives space. But for now, let's keep it simple...


This is not trading or investment advice nor a recommendation on anything discussed in this post. The information we are presenting are true and accurate to the best of our knowledge but these are relatively new products and we may have missed something or gotten something wrong - please consult with your advisor, IB or FCM before trading derivatives. Also check the CME website.


For context, Synchronicity is a Commodity Trading Advisor (CTA) and Commodity Pool Operator (CPO), and, together with its portfolio management team, has traded listed futures across every asset class. Synchronicity was one of the first shops to run a diversified digital asset fund and also one of the earliest firms to trade CME listed BTC futures, BTC futures options, and ETH futures - both on the screens and via block trades.


Just in the last month or so, CME launched listed options on the BTC and ETH micro futures. The micro futures themselves were announced in May of last year (2021). Because, originally, there were no options on these micro futures (and to a lesser extent because they were almost too small), we had paid little attention.



BTC futures - 1 contract = 5 bitcoin

BTC micro futures - 1 contract = 0.1 BTC


1 'big' contract = 50 micro contracts


ETH futures - 1 contract = 50 ETH

ETH micro futures - 1 contract = 0.1 ETH


1 'big' contract = 500 micro contracts



BTC futures options - 1 contract = 1 BTC future (which equals 5 bitcoin)

Expiry Last Friday of the Month

BTC futures micro options - 1 contract = 1 BTC micro future (which equals 0.1 bitcoin)

Expiry Last Friday of the Month

Week 1, Monday, Wednesday and Friday

Week 2, Monday, Wednesday and Friday

Week 3, Monday, Wednesday and Friday

Week 4, Monday, Wednesday and Friday


ETH futures options

There are no options on the 'big' ETH contract

ETH futures micro options - 1 contract = 1 ETH micro future (which equals 0.1 ETH)

Expiry Last Friday of the Month

Week 1, Monday, Wednesday and Friday

Week 2, Monday, Wednesday and Friday

Week 3, Monday, Wednesday and Friday

Week 4, Monday, Wednesday and Friday


It is early and some of the information below may change if the micros attract more volume and become more popular. It is also important to note that some market participants enjoy smaller exchange fees and commissions - but our guess is that despite the level of fee, the relationship between different contracts should be more or less proportional. Finally, to reiterate, this is an extremely small sample size and is meant really to act as an initial recording of what we've seen to help us chart the progress of these contracts as we move forward in 2022.


We traded both BTC and ETH futures micro options this month and here was our experience:


Spreads (distance between the bid and offer)

BTC micro option monthlies - wider than the 'big' contract options - but not by much

BTC micro option weeklies - wider than the 'big' contract and slightly wider than the monthlies - but not by much

ETH micro option monthlies - about the same on a relative basis as the BTC micro option monthlies


Size quoted

BTC micro option monthlies - usually somewhere between 50-200 contracts showing across the 1st two levels of market depth - so the equivalent of 1 to 4 'big' contracts - a little bit less than what we typically see for the 'big' options contracts but not too bad.

BTC and ETH micro option weeklies - we have only looked a handful of times but typically we have been seeing 50 contract type size in both - for BTC that means the equivalent of 1 'big', for ETH it is only 10 ETH worth (of 1/10th of a 'big'). So this is small size.


Cost and trade examples


(We'll focus mostly on exchange fees, add commissions in at your own rate)


BTC Monthlies:


BTC 'big' options - exchange fee $5.00/contract.

BTC micro options - exchange fee $1.60/contract,


Now, if a market participant wanted to buy 50 micro options instead of 1 'big' option (say so they had the granularity to get out of half of that position on a large move), the exchange fees alone would be $80 vs $5 per half turn (i.e. per trade).


Let's track a small trade example and a big trade example to put the fees into context:


Small micro trade:

Current price of BTC = $42,500 - pay (buy) $205.50 for 1 April $43,500 strike BTC micro monthly call option (expires 4/29/2022)

- notional value of trade at the strike price = $4,350

- premium paid $205.50

-break even = (43,500+2055+1.60) $45,556.60 or 7.19% move from $42,500.

The $1.60 plus commissions (let's say $2 for this half turn) - so $3.60 total - is high at 1.75% of premium paid.

Every $1,000 movement in BTC is $100 worth of P&L above the strike price (before costs).


Larger micro trade:

Current price of BTC = $42,500 - pay (buy) $205.50 for 50 April $43,500 strike BTC micro monthly call option (expires 4/29/2022)

- notional value of trade at the strike price = $217,500

- premium paid $10,275

-break even = (43,500+2055+80.00) $45,635 or 7.38% move from $42,500.

The $80 plus commissions (let's say $2 for this half turn) - so $180 total - is high at 1.75% of premium paid, but, if granularity is important to the trade, may still be acceptable.

Every $1,000 movement in BTC is $5,000 worth of P&L above the strike price (before costs).


Now compare large micro trade to large 'big' contract trade:


Current price of BTC = $42,500 - pay (buy) $2025 for 1 April $43,500 strike BTC micro monthly call options (expire 4/29/2022)

- notional value of trade at the strike price = $217,500

- premium paid $10,125

-break even = (43,500+2,025+5) $45,530 or 7.13% move from $42,500.

The $5.00 plus commissions (let's say $2 for this half turn) - so $7 total - is reasonable at roughly 7 basis point of premium paid .

Every $1,000 movement in BTC is $5,000 worth of P&L above the strike price (before costs).


ETH Monthlies:


ETH micro options - exchange fee $1.60/contract.


Now, if a market participant wanted to buy 500 micro options instead of what 1 'big' option would be if it existed (say so they had the granularity to get out of half of that position on a large move), the exchange fees alone would likely be $800 vs $5 per half turn (i.e. per trade)!


Weeklies:


BTC micro options - exchange fee $0.20/contract


So to compare it to 1 'big', 50 micro contracts would cost $10 instead of $5.


(we haven't traded ETH weeklies yet so we will update next time we post on this)



Notional Value


Notional value (with BTC at say $42,000) of 1 'big' contract = ~$210,000.

Notional value (with BTC at say $42,000) of 1 micro contract - ~$4,200.

Notional value (with ETH at say $3,200) of 1 micro contract - ~$320.



Conclusion


There is limited data and these are just initial impressions but here are our takeaways for the new BTC and ETH micro options:

  • Spreads are not too much wider than 'big' contract BTC options - this goes for monthlies and weeklies

  • Size quoted on the screen is okay for BTC micro monthlies and weeklies but is very low for ETH micro options

  • Hopefully the block market will provide more liquidity until the screens get more participants

  • Cost (exchange fees) are:

  • high for BTC monthly micro options

  • fairly reasonable for BTC weekly micro options

  • extremely high for ETH monthly micro options

  • Notional values

  • Definitely geared toward retail traders/investors

  • BTC micros can still be somewhat useful for professional traders but an e-mini version (at 1/5th the size of the 'big' contract) might be preferable

  • The ETH micro notional value is almost too low (in our opinion) and therefore the fees might prove to be somewhat of a challenge

The launch of the cryptocurrency micro futures and the options on those instruments is a move by CME to:


a) address the notional size of the 'big' contracts becoming too large and lacking granularity to trade positions and,

b) attract retail traders in to the space with smaller, lower-dollar-premium instruments and,

c) mimic some of the offshore exchanges weekly listing cycles for options to pull trading volume market share into the US.


We think this is a good first step. With more time and data points we will be able to see how the market reacts to these new products. CME will soon be facing more competition with FTX, Crypto.com, Bitnomial and Coinbase all joining the fray to properly access US derivatives customers - FTX's margin proposal alone could be a game changer, more on that in a future article/post.

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