What A Week!

We’ve previously spoken about idiosyncratic factors in Bitcoin’s favour that could break its correlation to equities – the post-halving halving impact on supply, the ETF effect on demand, and a positive regulatory environment. But wow, what a week – Bybit’s exchange hack, record outflows in the Spot Bitcoin ETFs, and the 90% plus drops in a multitude of Solana memecoins launched by high-ranking officials across different nations would have been enough to damage bullish sentiment without risk-on sentiment tanking across all assets.

Crypto

Macro

Derivatives

What a Week!

But wow, what a week – Bybit’s exchange hack, record outflows in the Spot Bitcoin ETFs, and the 90% plus drops in a multitude of Solana memecoins launched by high-ranking officials across different nations would have been enough to damage bullish sentiment without risk-on sentiment tanking across all assets.

Still, there have been some more signs of the pro-crypto regulatory environments – BlackRock announced they are adding a 1% to 2% allocation to the $48 billion iShares Bitcoin Trust ETF (ticker IBIT) in its target allocation portfolios that allow for alternatives. That news came amidst the dropping of several cases against crypto firms.

https://x.com/0xgaut/status/1895193875888869642

It’s not a bull run without a 25%+ drawdown

First, some perspective. Pullbacks in spot like this (BTC is down more than 20% from its ATH of $108K in January), are not uncommon in crypto bullruns. Each previous run to the cycle peak has been peppered with pullbacks of this size or larger. In July 2021, BTC crashed by 50% from its all-time high before rallying back above in November of the same year. The current drawdown is not the largest even in our current cycle (that prize goes to Dec 20th, 2022, recording -75.7%).

Figure 1. Historical drawdowns from the concurrent all-time high price (grey bar, right-hand axis) and BTC spot price (orange line, left-hand axis) from 2010. *Source: Block Scholes, Coingecko*

If this is the big correction, then previous bullruns have lasted longer. They have also provided greater returns by this point in every preceding cycle. Yes, those returns have diminished each time, but if historical precedent is anything to go by then this reset doesn’t look too different to those that we have seen before.

Figure 2: BTC returns before and after historical halving events (excluding 2012). *Sources: CoinGecko, Block Scholes*

However, a multitude of factors have contributed to this drawdown – and it is not a pullback unique to crypto-assets either. Rather, risk-on sentiment across the board has been slashed.

Starting first with the macro reasons: President Trump’s continued whipsawing comments regarding his tariff plans, the implementation of said tariffs and their potential start date has caused considerable uncertainty in markets. During a cabinet meeting on Wednesday, Trump added that he has decided on a 25% tariff on imports from the European Union. Though it is still unclear whether this is a blanket tariff on all imports, or select products, the EU in turn has vowed that it will “react firmly and immediately against unjustified barriers to free and fair trade”.

In addition to this, recent macro data has signalled a slowdown in the growth of the US economy (retail home sales in January fell, long-term inflation views have jumped to a near three decade high according to the University of Michigan’s recent consumer sentiment survey, and the Conference Board’s February survey, showed the largest single-month drop in consumer confidence since August 2021).

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Correlation not yet broken

In our recent macro report, we made a case that Bitcoin could potentially decouple from its correlation with macro risk-equities. This hasn’t yet materialised – the correlation with SPX has ranged around the 40% mark and still close to historical highs and correlation with NDX is ranging at a similar level.

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Figure 3. Rolling 90D correlation of daily returns between BTC and the S&P 500 Index. *Sources: Block Scholes, Bloomberg*

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Over the past week crypto ETF products have seen some of their largest outflows on record – Tuesday marked the largest single-day outflow ($1,138.9M). Additionally, MicroStrategy (Strategy), one of the largest buyers of Bitcoin equally slowed down their purchases so far this year. However, in mid-February, they purchased 20,356 bitcoins for approximately $1.99B in cash.

Figure 4. Daily net inflows to the U.S. spot BTC ETFs (blue bars, left-hand axis), Strategy Bitcoin purchases (red bars, left-hand axis) and BTC spot price (orange line, right-hand side axis). Source: Farside Investors, Block Scholes.

Derivative markets have portrayed a more puzzling picture throughout this sell-off. Initially, unlike similar spot price sell-offs in the recent past, 1-month implied volatility levels for BTC had minimal reaction to the spot drops, and remained close to historical lows. Only during today’s deepening in price did we see 1-month BTC tenors reacting in a more expected manner – jumping up to above 60% at the front-end. They’re now back below 50%.

Figure 5. BTC at-the-money implied volatility across selected tenors. *Source: Deribit, Block Scholes*

Skew levels at short-tenors for BTC have dropped to their lowest levels all month and one-month tenor skew has whipsawed in the past few hours, from being firmly skewed towards puts to now at a neutral level. Longer-dated optionality however remains firmly bullish – and we see it holding the same skew towards calls that it has since the election in November.