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March Monthly Recap:
The Aftermath

Thursday 2nd April 2020

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1/. Market in recovery mode

Bitcoin sold-off 50% intraday on the 12th of March as the most well known digital currency finally caught up with the record turbulences hitting global financial markets in response to COVID-19.

Bitcoin briefly traded below $4000 with exchanges struggling to deal with cascading liquidations: liquidity momentarily evaporated and spreads widened.

Given almost all bitcoin futures trading occurs with the use of leverage, most long futures positions were most likely called during this move. We recorded $1.5bln in sell liquidations for BitMEX’s XBTUSD perpetual swap contract on the 12th and 13th despite total XBTUSD open interest before the move being below $1bln!

Even after reclaiming $6,000, the bitcoin market remains in recovery mode on a number of metrics. Aggregated futures volumes which spiked to all-time-high with two consecutive sessions above $40bln have gradually retraced to more regular levels.

Total number of futures positions opened has halved and hasn’t recovered since, indicating limited appetite and / or capacity from traders to engage at current levels.

Order book depth, a measure of the market's liquidity, has been gradually improving but remains significantly wider than usual. This has an impact on bitcoin’s volatility and explains the more abrupt intraday swings than usual.

2/. Futures & Lending

BTC futures which had long been in contango have now shifted to backwardation, briefly trading down to -50% annualized before recovering to close to 0% by month’s end. 

Crypto lending businesses are seeing higher demand to borrow crypto as market-makers and traders have a greater demand for inventory which was reflected in rapidly rising interest borrowing rates for bitcoin & ether.  Conversely stable coin borrowing demand has softened as long existing cash & carry opportunities have disappeared for the time being.

3/. Options Flows

Bitcoin realized volatility erupted to level not seen since the infamous Mt Gox bankruptcy. Ten day realized volatility peaked at 321% indicating a 16.8% average daily move over a ten days period.

Implied volatility which had been steady around 60, rose to nearly 200 in the one month tenor. Skew spiked too as traders looked to cover risk and BTC miners and lending businesses hedged. 

Much of the block trading options flow in the week following the sell-off was driven by traders rolling March positions to April and June. Several large put-spreads were blocked. Market is pricing in a small event for the BTC halving, but with implied volatility elevated relative to historical levels it is not as pronounced in the implied volatility term structure.

Vol has been on a steady march down for the last two weeks of March. As IV’s have gotten back to 100, call over-writers have looked to re-establish positions, where paradoxically these trades were not taking place as much at the high of vol.

Options volumes, which had been growing fast for the first two months of 2020 have been consolidating as nearly 50k bitcoin options expired in March and the spot move decreased the optionality of existing upside strategies.

4/. Stable coins

Leading stable coins did well in this environment. USDT started to trade at a premium since the sell-off and still buys you more bitcoins than real US Dollars. Its market cap crossed $6bln towards the end of the month reflecting higher demand for the controversial cryptocurrency. Critics imagining a crypto world without Tether are being proved wrong so far. 

USDC also saw significant growth of its market cap and is now larger than Gemini USD, PAX USD, Binance USD, True USD and DAI combined. Facebook’s Libra project has gone relatively quiet in the last few months - the market could be surprised later in the year if Libra becomes a reality faster than anticipated. 

5/. Macro & Seasonality

After briefly exhibiting safe-haven qualities during the Iran tensions earlier this year, BTC behaved very much like a risk asset in March, selling-off as global markets scrambled for US Dollars.

The Gold derivatives market experienced significant disruption last week as COVID-19 related constraints made transport of gold to New York difficult where CME COMEX futures contracts are supposed to be delivered. It would be nice if there were a digital version of gold...! Bitcoin futures contracts see less than 1% of the volume of its Gold counterpart at the CME.

Bitcoin ended up Q1 down 11%, not a catastrophic outcome given current circumstances and compared to S&P500 which had its worst quarter since 2008 down 20%. It was nonetheless a third consecutive negative quarter for the digital currency - first time since 2015 - and its investors will be hopeful Q2 brings favorable seasonality once again.

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