Crypto Markets: October Monthly Commentary
Happy (uneventful) Birthday to Bitcoin!
While it was an eventual month for industry development (more below), and also an outperforming month for Orichal (more below), October price actions has been uneventful for the overall macro-markets. 30-day volatility of bitcoin (BTC) was just 1.46%. While this marks the lowest level in 2017, we are not at the lowest point yet; the lowest 30-day volatility happened in January 2016 when it was 0.73%.
Whats more interesting to note is that, while volatility can trend downward for a period of time in traditional markets like equity, in the bitcoin markets such volatility downtrend has occurred twice in the past (Jan-Jul 2012, Mar-Oct present 2018). As you can see from the chart below, volatility on bitcoin reversed sharply each time. We do believe it is an opportune time to be long options (vol) through buying low delta straddles as we hope to expect volatility to revert higher to historical means.
With Bitcoin marked its 10 year birthday, the institutional adoption has already begun and with increased regulatory oversight will gradually drive cryptocurrency volatility to a more sustained level in the years to come.
The battle of the Stablecoins
Ironically most of the activities last month focused on (un)stable coins. Every now and then the crypto-community raises concern about Bitfinex and Tether’s (USDT) health, with this time the market managed to depeg USDT from parity. What ensued after was the market gunning for all other stable coins such as Paxos (PAX), TUSD (true USD), Gemini GUSD, to name a few. Panic reached fever pitch when the premium of TUSD to USDT came to 24%, causing the market to use its available depreciated USDT to buy crypto instead as the premium spread is lower.
In addition, we see regulated/audited stablecoins as a very important stepping stone for institutional investors and mass market to easily trade with the peace of mind the digital fiat is backed by real dollars. We do find the market somewhat comical for created many forms of USD backed stablecoin though (GUSD, USDC, TUSD, PAX, etc).
Where are the institutional flow?
A lot of news making headlines this month starting with NYSE’s very own Baakt Exchange expecting its launch in December; Fidelity to launch its crypto custodian and executional services to hedge funds alike; Greyscale’s institutional investments rise to 329 million where 59% of its investments came from institutional investors. Yet the market cap stays at a stagnant 205 billion USD (not much change since August 2018).
While the whole market is awaiting the next bull run from institutional flows, we all ponder when (or whether) it will come and if it does will it actually trigger a bull run at all, given all these positive news barely moved the market?
At the desk we do believe that the catalyst lies in the regulators taking a more welcoming stance on allowing Crypto to be mainstream, and it will have to start with the SEC. At the very least, Hong Kong’s very own SFC has just issued a long overdue circular on setting up a sandbox to regulate crypto exchanges serving Hong Kong customers — we find the news positive as they are taking actions to clean the market from lack of KYC and market manipulation controls.
In the meantime, we will continue to play the sideways market through the funding market for yield and scouting technical breakout signals on undervalued tokens.
Orichal — Multi-strategy Master Portfolio (Private Investment)
The portfolio closed out October strong with +20% performance, second consecutive month with positive returns. Demonstrating the value of our multi-strategy approach in helping our portfolio weather the seasons.
Where September performance was mostly attributed to tactical trading, October performance was mostly attributed to our ICO investments — APOT and FTM have listed, surged as high as 7x and +35% respectively on their first day; while we remain holders of the positions, the realized gains taken from ICO contributed half of our month’s return.
October was also a relatively busier month for the portfolio (we have taken 79 actions vs 55 in September, across all strategies and re-balancing). For the second consecutive month, tactical trade again attributed positively, despite seeing limited opportunities where our event-driven algo strategy could deploy capital over October.
While Bitcoin volatility remains low, with recent FANG stocks (and US stocks) volatility actually higher, as mentioned the portfolio has taken the advantage to long options (vol) in the portfolio. We have spent small to purchase March 2019 expiry strangle (4000 & 12500 strikes) to enhance our portfolio positioning. Volatility was ~34% then vs ~41% now, we see further upside risk in Vol. More importantly we feel comfortable with this trade long-term.
While Orichal does not see an immediate concern on Bitfinex’s financial health, we do remain vigilant and have started migrating our USDT balance into audited stablecoins such as TUSD and PAX whenever the premium spread is low (below 1%) for the aforementioned reasons.
As part of risk management for the portfolio, aside from diversifying our stablecoin balances, we also actively manage counter-party risk by re-shifting balances across exchanges and off it into secured hard wallets, while our operations and legal team continues to explore reasonable custodian options.
At Orichal, our investment committee and our operations team, across Hong Kong and Korea, are working proactively and tirelessly for our investors/shareholders.
From the way we invest, to the way we manage risk and operations, we are truly multi-dimensional.
We’re on social media — please follow us!
Last but not least — we have set up social media channels to provide more real time news and opinions on the blockchain and crypto markets. Please follow us @OrichalPartners for twitter, as well as liking our medium and linkedin articles published by our team time to time!
Have a great month ahead!
The Investment Committee at Orichal Partners
