Last week a U.S. Judge ruled that XRP is not a security, and the SEC accepted the BlackRock bitcoin ETF application, moving it to the next stage of the approval process. Within minutes of this XRP news, the token jumped from $0.45 to $0.61, pushing the price up over 25%. While these decisions and the many more coming led to even more regulatory questions, it is clear that rule changes are a significant factor in digital asset volatility.
As an advisor on digital assets, you must consider how current regulatory events and recent failures affect pricing and trade volume for bitcoin, ether and alt-coins.
Macro state of crypto – where it has been and what's next
In 2022, Terra Luna’s collapse, the crypto hedge fund 3AC’s bankruptcy, FTX’s scandal and other meltdowns pushed the industry into a bear market. These headlines drove the entire sector lower, often led by altcoins.
However, the first half of 2023 flipped a lot of these crypto relationships on their head as macro economic events splashed news headlines.
Bitcoin led crypto higher in January as the Fed’s hawkish narrative began to soften. This move was accompanied by a positive “spot/vol” regime, with traders buying options as Bitcoin rallied – a relationship not witnessed in 2022 when only price crashes seemed to drive volatility higher.
The takeaway was that bitcoin was trading on fundamental macro news, as opposed to crypto specific events.
If Ethereum is a crypto “technology bet,” bitcoin is a monetary alternative “pure-play.”
YTD performance of BTC (orange) and ETH (blue)
This narrative juxtaposition became obvious in March as the SVB banking crisis took hold.
Comparing the YTD performance of BTC and ETH spot prices, we can clearly see that BTC began an outperformance of ETH in reaction to the banking crisis and the Fed’s emergency response.
BTC has been able to hold onto this outperformance ever since.
YTD Ratio of implied volatility (ETH DVol divided by BTC DVol)
To see further evidence of a shift in these trading dynamics (a move towards macro events and a shift away from crypto specific news) we can observe the forward-looking option market activity.
The ratio of Deribit’s DVOL indexes, a comprehensive 30-day to maturity measure of option implied volatility (think the VIX of BTC and the VIX of ETH), shows us that the typical implied volatility premium of ETH over BTC began to dissipate in reaction to macro news events.
In mid-January we saw a market adjustment from the Fed beginning to slow down its hawkishness. This sent BTC higher and BTC IV (implied volatility) relatively higher (chart goes down).
Then in early February we saw a major outperformance linked to the Labor Department’s monthly non-farm payrolls (NFP) number. This quickly killed the idea of a Fed hawkish slowdown; BTC dropped (along with gold and other interest-rate sensitive assets) and BTC IV went down, relative to ETH IV (chart goes up).
The SVB crisis again nudged BTC IV higher, only to be temporarily paused by the ETH Shanghai upgrade.
Today, ETH IV trades around parity to BTC IV, even briefly at a discount.
Where does this leave us for the second half of 2023?
The Fed remains in a “wait-and-see” mode, after recently doing a “rate skip” at their June FOMC meeting. Although other central banks continue to raise rates, the U.S. macro picture is moving into the background as crypto specific news events become “top-of-mind.”
The regulatory events surrounding Binance, Coinbase and XRP are becoming major drivers of activity.
Today, BTC is defined as a commodity, while ETH’s categorization is more ambiguous.
This means there’s increased sensitivity for ETH’s “technology bet” narrative around regulation. A lot of ETH’s value comes from its utilization and the various DeFi, NFT and ERC-20 protocols built on top of the Ethereum infrastructure.
Lately, volatility surrounding the consumer price index (CPI), NFP and other macro events seems to have settled down, while regulatory clarity around crypto, a potential spot ETF approval and the XRP resolution is becoming a key focus; this paradigm shift could lead the market towards higher beta “altcoins” in the crypto space.
Historically, altcoins have outperformed BTC in bull markets, and the second half of 2023 is off to a bullish start, so far accompanied by mostly favorable crypto-specific news headlines.
That the recent events have increased ETH IV relative to BTC IV offers a hint that option traders are also paying attention.
- Greg Magadini, CFA Amberdata
Ask an Advisor
I help clients include crypto in their retirement accounts.
Can advisors invest in crypto in 401K (retirement) accounts for their clients?
The short answer is yes, you can invest crypto in a range of retirement accounts from 401K plans to individual retirement accounts. First, make sure that you are speaking to a licensed investment advisor. Investment management is highly regulated so your Bitcoin advisor should be properly licensed. Ask for the advisor and their firm’s CRD #. You can look it up on brokercheck.org to vet that they are legit.
Can my clients hold crypto in these accounts, or just funds?
Short answer both. The accounts could hold pure crypto, a crypto futures fund, a trust product (Like GBTC), or equities like COIN stock (which the company holds pure Bitcoin on their balance sheet.) In any investment besides pure crypto the main things to consider are tracking differences from the underlying and different fee structures.
Dan Morehead, Pantera Capitals founder predicts it’s time to rally, the bull market is coming. With over 10,000% returns on their crypto hedge fund, Dan has my attention.