Incredible Rally but Dark Clouds on the Horizon?
Written by Dick Lo
In a complete 360° turnaround versus a month ago (during which good news was met with minimal market reaction while bad news exacerbated moves to the downside), market sentiment now is unquestionably bullish with seemingly significant bad news — such as the Senate’s inability to put forward a more crypto-friendly amendment bill and the largest DeFi hack in history to the tune of US$600 million — simply brushed aside as the rally powered on. This can be well-illustrated by the Crypto Greed and Fear Index which has flipped from Extreme Fear last month to Extreme Greed yesterday before the markets pulled back today.
ETH has continued to perform strongly post EIP-1559 going live and quashed concerns (including ours) that it might have been, at least initially, a buy-the-rumour-sell-the-fact event. Heightened DeFi activity and the current NFT hype have led to more than US$140 million in ETH burned since EIP-1559. Notably, ETH was up on 21 out of 24 trading days to 13 August, covering the period before and just after the London hard fork.
In addition to the impressive performance of ETH, several alts have recorded 100%+ returns since the lows seen in July. This has led us to become increasingly cautious as the probability of a technical pullback increases, if it is not already taking place as we speak.
Having experienced the magnitude of the selloff in May (as well as countless drawdowns in the past), one must be vigilant of another potential correction in the short-term, especially if there is a shock from a selloff in risk-assets (say inflation fears driving equities down 10%+ from current all-time highs which is totally fathomable). While we share the same long-term bullish view as our clients, we have been suggesting putting on downside protection on long positions with increasing interest from our clients over the week on these strategies.
We like the BTC 3-September $40k/$54k bearish risk reversal which at the current BTC spot of $46k, can be executed at no cost. This strategy protects a long portfolio against a short-term sharp selloff below $40k while capping the upside at $54k, a level which would require several key resistance levels to be broken.
Technically, if we see a break of $3,030 on ETH, we will be looking at $2,700-$3,000 as the potential new trading range. Whilst we maintain a constructive view on ETH, we will be looking for a pullback before putting on bullish strategies.
We are revisiting our trade idea from May 1 (TDX Weekly Options Summary — 1 May 2021) — the ETH 31-December $5k/$10k call spread. This is a low-cost way to express a bullish view for where ETH will finish the year and should the markets pull back, the risk-reward ratio will become ever more attractive. This strategy would currently cost around US$300 for a max payout of US$5k should ETH end the year at $10k or higher.
It is always with great interest that we look back at our previous trading ideas to see if we have helped our clients in some way to navigate the volatile markets, or led them astray. At the very least, we are in the same boat and as rocky as it may be, we will ride out it together.
Not financial advice, but always here for a chit-chat.
Team TDX Strategies