Trade the Extremes
Crypto Under Pressure
USD Hits New 2 Decade High
Yesterday really was more of the same – another risk rout. Equities sold off, yields flew, gold lower – further deleveraging going through the markets. Overnight, we have seen dip buyers emerge helping to stop the rot…for now.
There seemed to be only two things in the green yesterday and that was the USD and the VIX (volatility index). The fact the VIX remains elevated (above 30) is a sign we are in for a wild ride. The sentiment seems undoubtedly bearish but the market isn’t quite capitulating yet. A straight line move seems unlikely so to see moments of risk rallying is to be expected. We remain firmly in a ‘trade the extremes’ mode at the moment.
We have been moaning for a while now that crypto markets didn’t have any crypto specific news and it was getting boring and was just trading like equities. Please hit me if I complain about a lack of crypto news again. The Terra fall out we mentioned yesterday continues to send shockwaves through the crypto markets. For the second time Terra, UST, lost its peg in 48 hours. UST is the third largest stablecoin by market cap and dropped as low as $0.65 – remember it’s supposed to be trading at $1! Unlike its counterparts, USDC and USDT, which are backed by cash and assets in the bank, UST is designed to hold 1:1 with the dollar via its algorithmic relationship with Terra’s native asset, LUNA. Minting LUNA requires the burning of UST and vice versa and arbitrage opportunities are supposed to keep UST 1:1 with the dollar. The Luna Foundation Guard has built up healthy reserves (c.$4bn) of BTC, AVAX, LUNA and UST to deploy in case its algorithm stopped working. Thus far it has loaned out $1.5bn to defend the peg – it is quite safe to say it hasn’t worked yet. It was only a month ago Luna was above $100 and is now currently sub $40. The liquidations seen in LUNA has spilled over to the whole crypto market. We flagged yesterday that BTC was at risk of testing $30k and it actually traded below there before finding some support. As we highlighted yesterday, we are happy to buy these dips in crypto – we are just ensuring to leave room to add if further sell offs happen. The caveat to all of this is what extent the Terra news has on this market. For those of us who remember 2008, we had what is known as a ‘run at the banks’. This is where healthy financial institutions faced massive withdrawals due to the panic that had set in. If this panic now spills over into other stablecoins and there is a run at them then to say the stability of the crypto ecosystem comes into question.
We have scaled back positions in FX and actually feel the USD may sell off today. This isn’t our view changing to that of a risk on one but more a relief rally may be on the cards today. Ultimately we will look to buy into USD sell offs especially versus GBP.
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