BTC is down >10%; Is this a buy-the-dip moment?
Just because something is cheap does not mean it is a good buy, and just because something is expensive does not mean it is a sound investment. This investment adage applies to Bitcoin (“BTC”) ever more so than now.
Bitcoin prices dropped 11% over the past week, triggered by substantial BTC sales by the German government. Concerns loom about the forthcoming Mt. Gox repayments, which are likely to increase near term supply.
Persistent downward pressure is anticipated as further sales are pending. Yet BTC ETFs are witnessing significant inflows, indicating that investors are capitalizing on lower prices.
This paper explores a hypothetical spread trade involving short micro BTC futures and long micro-ETH futures, given the near term headwinds facing BTC and the tailwinds of ETF approval imminent for ETH.
BTC DECLINES 11% DUE TO LARGE SALES
BTC prices have plummeted by 11% since July 1st, breaching the critical USD 60,000 support level and 200-day moving average.
This sharp decline was propelled by a series of negative factors:
1) German government liquidating its BTC holdings: The German government has been liquidating its BTC holdings which were seized by the German police earlier this year. The government has already liquidated 10,000 BTC (USD 550 million at current prices) since mid-June. Crucially, the German government still holds more than 42,000 BTC (USD 2.3 billion) which could have a major impact on markets if sold. The consistent outflows to exchanges in July suggests the impact could be felt in the near term.
2) Mt. Gox begins repayments: On Friday 5/July, Mt. Gox stated that it had started transferring BTC and BCH to its customers 10 years after the exchange was hacked. More than 47,000 BTC was moved out of the Mt. Gox cold wallets on 5/July, suggesting the repayments are ongoing. Given the size of the transfer, the impact could be substantial. While the repayments will take place in a staggered manner, most customers are expected to receive their BTC within the next six months. Aggregate repayments will total up to 140,000 BTC.
3) Large Long Liquidations: Due to the sharp market moves in the past week, BTC derivatives saw large liquidations for both long and short positions. However, the overall liquidations were much larger last week. BTC longs worth more than USD 210 million were liquidated on 4/July and 5/July. The large liquidations further exacerbated the decline. Large short liquidations over the past 12 hours suggest volatility persists in both directions.
4) Fear Sentiment Dominates BTC: BTC’s fear and greed index has rapidly fallen to its lowest level in the past year. Over the past month, sentiment has shifted rapidly from extreme greed to fear. Heightened fear sentiment could impact the resilience of BTC holders. At the same time, periods of extreme fear can also represent buying opportunities.
Long-term BTC holders (HODLers) who have not moved their tokens in more than 1Y have been remarkably resilient so far.
Although the balance from this cohort has declined 7% YTD, it has been due to GBTC outflows, the impact of which was absorbed by other ETFs such as IBIT and FBTC.
As sentiment swings the other way given the current sharp decline, more holders could start to sell their BTC.
5) BTC ETFs saw huge inflows last week: Following a mixed June which saw outflows from BTC ETFs total USD 1 billion, ETFs are once more seeing inflows. Since 27/June, more than USD 200 million have flowed. The largest inflow was on Friday 5/July, when price fell sharply. This suggests ETF buyers are using the price corrections as an opportunity to buy more BTC. This presents a potential bullish driver for BTC if prices fall too low.
ETH RELATIVELY RESILIENT AS ETF APPROVAL BECOMES IMMINENT
Mint Finance covered the relative outperformance of ETH to BTC in a previous paper. Approval for ETH ETFs is imminent. Bloomberg analysts previously suggested that approval could come through in early July. However, due to delays and re-filings, the updated approval deadline according to Bloomberg analysts is currently 15/July.
Recent re-filings with the SEC showed minimal changes in the applications suggesting the applications are close to their final form and should be ready to trade within next few weeks.
ETH ETF approval will drive spot buying and support ETH price. This is likely to drive specific outperformance of ETH relative to BTC.
HYPOTHETICAL TRADE SETUP
BTC faces multiple near-term headwinds. However, a directional position may be inadvisable given the bargain buying for ETFs and the sizeable, short position liquidations as price recovered on 8/July. Volatility remains high which presents a risk to a directional short position.
Instead, investors can opt for a spread trade consisting of a bullish view on ETH and a bearish view on BTC. The spread trade effectively balances out price movements by offsetting declines in one cryptocurrency with gains in another. This approach provides investors with exposure to the relative performance of BTC and ETH.
The recent decline in price has led to a decline in the ETHBTC ratio offering a compelling entry point to benefit from the ETF approval while maintaining a bearish view on BTC.
The following hypothetical trade setup combines a long position in 19 x METN2024 and a short position in 1 x MBTN2024.
• Entry: 0.05295
• Target: 0.05750
• Stop Loss: 0.05050
• Reward to Risk: 1.75x
Notably, this trade does not match notional exactly as the current BTC/ETH ratio is 18.85. Alternatively, CME offers Ether/Bitcoin Ratio (EBR) futures that enable investors to gain exposure to the ETH/BTC ratio through a single transaction and match notional exactly.
Each contract of these futures corresponds to an exposure of USD 1,000,000 multiplied by the index value (approximately USD 52,280 at a ratio of 0.05228 as of May 31).
These contracts enable investors to obtain relative value exposure on these closely correlated assets without taking a directional stance. The EBR contract is also substantially more margin efficient than individual futures on both legs.
Liquidity on the EBR contract is lower than the MET and MBT contracts for now. Volumes in the EBR contract saw a strong uptick in June suggesting greater investor activity in these futures.
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme/.
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
Bitcoin prices dropped 11% over the past week, triggered by substantial BTC sales by the German government. Concerns loom about the forthcoming Mt. Gox repayments, which are likely to increase near term supply.
Persistent downward pressure is anticipated as further sales are pending. Yet BTC ETFs are witnessing significant inflows, indicating that investors are capitalizing on lower prices.
This paper explores a hypothetical spread trade involving short micro BTC futures and long micro-ETH futures, given the near term headwinds facing BTC and the tailwinds of ETF approval imminent for ETH.
BTC DECLINES 11% DUE TO LARGE SALES
BTC prices have plummeted by 11% since July 1st, breaching the critical USD 60,000 support level and 200-day moving average.
This sharp decline was propelled by a series of negative factors:
1) German government liquidating its BTC holdings: The German government has been liquidating its BTC holdings which were seized by the German police earlier this year. The government has already liquidated 10,000 BTC (USD 550 million at current prices) since mid-June. Crucially, the German government still holds more than 42,000 BTC (USD 2.3 billion) which could have a major impact on markets if sold. The consistent outflows to exchanges in July suggests the impact could be felt in the near term.
2) Mt. Gox begins repayments: On Friday 5/July, Mt. Gox stated that it had started transferring BTC and BCH to its customers 10 years after the exchange was hacked. More than 47,000 BTC was moved out of the Mt. Gox cold wallets on 5/July, suggesting the repayments are ongoing. Given the size of the transfer, the impact could be substantial. While the repayments will take place in a staggered manner, most customers are expected to receive their BTC within the next six months. Aggregate repayments will total up to 140,000 BTC.
3) Large Long Liquidations: Due to the sharp market moves in the past week, BTC derivatives saw large liquidations for both long and short positions. However, the overall liquidations were much larger last week. BTC longs worth more than USD 210 million were liquidated on 4/July and 5/July. The large liquidations further exacerbated the decline. Large short liquidations over the past 12 hours suggest volatility persists in both directions.
Source: CoinGlass
4) Fear Sentiment Dominates BTC: BTC’s fear and greed index has rapidly fallen to its lowest level in the past year. Over the past month, sentiment has shifted rapidly from extreme greed to fear. Heightened fear sentiment could impact the resilience of BTC holders. At the same time, periods of extreme fear can also represent buying opportunities.
Source: Alternative.me Crypto Fear and Greed Index
Long-term BTC holders (HODLers) who have not moved their tokens in more than 1Y have been remarkably resilient so far.
Although the balance from this cohort has declined 7% YTD, it has been due to GBTC outflows, the impact of which was absorbed by other ETFs such as IBIT and FBTC.
As sentiment swings the other way given the current sharp decline, more holders could start to sell their BTC.
5) BTC ETFs saw huge inflows last week: Following a mixed June which saw outflows from BTC ETFs total USD 1 billion, ETFs are once more seeing inflows. Since 27/June, more than USD 200 million have flowed. The largest inflow was on Friday 5/July, when price fell sharply. This suggests ETF buyers are using the price corrections as an opportunity to buy more BTC. This presents a potential bullish driver for BTC if prices fall too low.
ETH RELATIVELY RESILIENT AS ETF APPROVAL BECOMES IMMINENT
Mint Finance covered the relative outperformance of ETH to BTC in a previous paper. Approval for ETH ETFs is imminent. Bloomberg analysts previously suggested that approval could come through in early July. However, due to delays and re-filings, the updated approval deadline according to Bloomberg analysts is currently 15/July.
Recent re-filings with the SEC showed minimal changes in the applications suggesting the applications are close to their final form and should be ready to trade within next few weeks.
ETH ETF approval will drive spot buying and support ETH price. This is likely to drive specific outperformance of ETH relative to BTC.
HYPOTHETICAL TRADE SETUP
BTC faces multiple near-term headwinds. However, a directional position may be inadvisable given the bargain buying for ETFs and the sizeable, short position liquidations as price recovered on 8/July. Volatility remains high which presents a risk to a directional short position.
Instead, investors can opt for a spread trade consisting of a bullish view on ETH and a bearish view on BTC. The spread trade effectively balances out price movements by offsetting declines in one cryptocurrency with gains in another. This approach provides investors with exposure to the relative performance of BTC and ETH.
The recent decline in price has led to a decline in the ETHBTC ratio offering a compelling entry point to benefit from the ETF approval while maintaining a bearish view on BTC.
The following hypothetical trade setup combines a long position in 19 x METN2024 and a short position in 1 x MBTN2024.
• Entry: 0.05295
• Target: 0.05750
• Stop Loss: 0.05050
• Reward to Risk: 1.75x
Notably, this trade does not match notional exactly as the current BTC/ETH ratio is 18.85. Alternatively, CME offers Ether/Bitcoin Ratio (EBR) futures that enable investors to gain exposure to the ETH/BTC ratio through a single transaction and match notional exactly.
Each contract of these futures corresponds to an exposure of USD 1,000,000 multiplied by the index value (approximately USD 52,280 at a ratio of 0.05228 as of May 31).
These contracts enable investors to obtain relative value exposure on these closely correlated assets without taking a directional stance. The EBR contract is also substantially more margin efficient than individual futures on both legs.
Liquidity on the EBR contract is lower than the MET and MBT contracts for now. Volumes in the EBR contract saw a strong uptick in June suggesting greater investor activity in these futures.
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme/.
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
Full Disclaimer - linktr.ee/mintfinance
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