The correlation is breaking

Bitcoin correlation with equities particularly the NASDAQ and SP500 has finally started to break but not in the direction many crypto investors were expecting

The information contained here is for general information only. It should not be taken as constituting financial advice. Stormrake is not a financial adviser. You should consider seeking independent financial advice prior to making any personal investments.

Is this what pain looks like?

The chart above was put together by Dylan LeClair, a Bitcoin analyst and contributing writer for Bitcoin Magazine and he supplied the chart with the following ominous message; “Seven straight daily red candles for BTC while equities have caught a bid. Bitcoin has served as equity market beta for all of 2022, and is now selling off in an uptrend. If/when equites turn over next, expect a firesale”.

As mentioned in previous Morning Notes, controlling your emotions and tempering your enthusiasm allows you to step back and look objectively at short to medium term risks that face your portfolio.

We understand what it means to be a relentless Bitcoin Bull and if your thesis involves a price target of $1 million dollars per BTC then by all means keep stacking Sats and ignore the noise around you. For those who are seeking to deploy capital at opportune times or looking to reduce their risk, read on for a deeper breakdown on some headwinds we’re facing as an asset class.

Divergence examined

We can see the liquidation cascade and crypto credit crunch that occurred in late June has caused quite a split in risk appetite between Bitcoin and equities. In the bull market crypto holders were rewarded by owning upside beta but now entrenched in a bear market that same risk premium means they own downside beta. In short you outperform in bull markets and the same outperformance is still present in bear markets but to the downside.

This doesn’t mean that it’s time to hit the panic button and start selling relentlessly especially if existing positions are already underwater, it just means we will be better rewarding capital allocation with limit orders instead of hitting the market bid.

ETH Backwardation

Stormrake research has identified one of the largest backwardation spreads in recent memory.

Let’s first understand what we’re talking about. As per investopedia, “Backwardation is when the current price of an underlying asset is higher than prices trading in the futures market. Backwardation can occur as a result of a higher demand for an asset currently than the contracts maturing in the coming months through the futures market”.

Interest rates are rising fast but the effective interest rate for borrowing dollars against ETH is negative. Large traders are buying ETH and selling (shorting) ETH Futures to take advantage of the possibility of an ETH fork where 2 chains materialise. In essence the holder of physical ETH would own both chains but the holder of Futures would only hold one. The other possibility is that traders are expecting that ETH merge is successful but people will sell the news.

So, this has opened up an opportunity where some traders are looking to do the opposite and borrow dollars against ETH holdings and Earn 3+% APR and receive Dollars today. The danger here is the possible ETH split (Fork).

Another strategy for swing traders who believe the 3% backwardation is temporary is to sell ETH and buy Futures and then reverse the trade if Backwardation disappears or reduces.

Regardless of what happens with the ‘ETH Merge Trade’ there will be monumental opportunities and huge risks to navigate.

Major news development

Coinbase has been selected by BlackRock to provide their Aladdin clients access to crypto trading and custody via Coinbase Prime.

This news has set COIN 0.00%↑ shares alight and is currently up over 41% for the week but yet again, I argue for temperance and want the intrepid crypto investor to see past the headlines and understand what this actually means.

It means that Blackrock’s clients won’t be receiving sovereign Bitcoin where they own their keys or potentially even get the chance to take it off the investment platform, effectively hidden behind layers of obfuscation and allowing a ton of room for rehypothecation.

We here at Stormrake advocate for self custody or working with a platform where if they do offer custody solutions, that you as the client have the ability to withdraw your coins at any time.

Visit us at stormrake.com to learn more.

Disclaimer

All statements made in this material are made in good faith and we believe they are accurate and reliable. Stormrake does not give any warranty as to the accuracy, reliability or completeness of information that is contained here, except insofar as any liability under statute cannot be excluded. Stormrake, its directors, employees and their representatives do not accept any liability for any error or omission in this newsletter or for any resulting loss or damage suffered by the recipient or any other person. Unless otherwise specified, copyright of information provided in this newsletter is owned by Stormrake. You may not alter or modify this information in any way, including the removal of this copyright notice.