Let's start off with a brief review of the latest CME Commitment of Traders (COT) report, which shows that as of 7/2/2019, asset manager/institutional long positions are at 188 vs 310 and short positions are at 146 vs 0. In other categories, leveraged long positioning stands at 3,253 vs 3,093 and short positions at 3,326 vs 3,246. Finally, dealers are now net long at 36.
The Bitcoin futures curve remains in deep contango and the daily price swings are not for the fainthearted, especially when considering that earlier in the week, 7,425 BTC was sold on one of the major cryptocurrency trading platforms in 23 minutes. It is anybody's guess how long the current market structure will remain in place and those with a good memory will remember the contango delta reached the sky high $2k level back in Dec’17, before crumbling in a blink of an eye.
Factually speaking, there are several reasons that could cause the contango to collapse. For one, interest rates would have to decrease a large amount (indirectly applicable in crypto but worth keeping an eye on DeFi market). Another reason for such a move is so-called “delivery concern”. When a producer, dealer, or speculator is short the front month, come expiration, they have the choice whether to make a delivery or not. If not, the holder essentially needs to cover shorts and lease/borrow the asset from someone else and/or roll your shorts to a back month. The price of Bitcoin has risen from $4k in Q1 2019 to $13k, the cost to hold/roll the positions increased accordingly, for some the price may be too high...strong hands are hedged and weak speculative hands are long, at one point the imbalance could tip over the edge and positions could get squeezed.
It is now less than a month until Litecoin’s block reward halving event, where the reward will decrease from 25 to 12.5 LTC. Given the recent run-up in prices and the inability of the broader market to sustain further upside, profit-taking should not come as a surprise. The 3-month correlation vs BTC has fallen to 0.6 from the 0.85-0.9 area. Relative to EOS, the correlation remains in the 0.8 area, while relative to Bitcoin SV, the correlation has collapsed to 0.45. The decoupling may be nearing its peak and this offers a good relative value play vs its peers across the larger cap universe. The question is, where will the outflow of capital go? As pointed out in the past, XRP offers an attractive contrarian trade opportunity given its underperformance over the course of 2019, as does BSV given its ambitious development roadmap and increasing block size.
Finally, the saga between Bitfinex and Tether vs NYAG doesn’t show signs of ending anytime soon. Following the filing earlier in the week, the next key date is July 29 (scheduled hearing on the motion to dismiss). As per most recent reports, the NYAG indicated that based on the series of evidence gathered and provided to the court, Bitfnex had customers log in to its platform as recently as Dec. 18, 2018. Further, Exhibit (S) – H also showed the correspondence between Bitfnex and the billionaire hedge fund manager Michael Novogratz’s Galaxy Digital to onboard the latter as a Bitfinex customer in October 2018. In addition, the NYAG provided evidence allegedly showing that Bitfinex held accounts with two New York banks – Signature Bank and Noble Bank – and at least “one other New York-based financial institution during the relevant time period, which they used to transfer money to and from clients of the Bitfinex and Tether platforms.”
Thank you for reading,
The BeQuant’s Analytics team