Daily market commentary from 04.01.2021

An overview of what is happening in the crypto markets, summarised daily by Crypto Finance AG Senior Trader Patrick Heusser in the market commentary.

Market commentary

Good Morning - and Happy New Year!

I think that the current market movements are reason enough for me to share my thoughts with you.

Currently, my focus is on the topic of the blow-off top, but also on the potential timing of rotating some exposure from bitcoin into other coins.

First, let's talk about the blow-off top. I have mentioned it in earlier market commentaries, but since then, I have not seen a clear setup that we would meet the criteria. Today, it does look to me like we are getting very close to it (in my opinion, I think we will never see a "clear" setup: things are just never black or white).

The indications I track to identify it are as follows:

• Perpetual future funding rates
• Term basis on futures
• Liquidation amounts and speed
• Future OI (open interest) & traded volume
• Behaviour/content of spot market order books

The perpetual funding rates, the liquidation amounts, and speed plus future OI are probably the most jumpy ones. But they are powerful indicators in combination with the other points. Over the past 24 hours, we have seen over $1bio in liquidations. We have not seen liquidations over $1bio since the March sell off. To be fair, though, during that period, the bitcoin$ price was around $6k, which means that at least 4-times more bitcoins were traded. In terms of bitcoin capital at risk, traders put less coins on the line.
Here's liquidation data from bybt.com:

The perpetual funding rates are clearly in overheated territory. Especially high leveraged platforms, such as Binance, Bitmex, and OKEx and their majority share of traded volume are dragging up the "mean" (black line). Here are the perpetual funding rates from glassnodestudio:

The term basis, which I believe is an indicator that more advanced traders use to look at the market structure, shows a stressed market environment. In annualised percentage terms, both of them are trading at 19%. My personal upper and lower bands are this: sell the basis in the 20% annualised area and buy it between 5-9%. This is why we mentioned (not too long ago) that we started to turn some of our perpetual basis positions into term-basis positions (long bitcoin in spot versus short futures). It is a less directional trade if you are not sure if the market will turn.

Bitcoin March Term Basis (FTX futures):

Bitcoin June Term Basis (FTX futures):

Even though we saw massive liquidations, which, for example, in March resulted in a massive futures OI decline, this does not seem to be the case right now. OI is in a healthy upward slope.

Behaviour or content of the various order books (heat maps) in combination with on-chain analysis of where the coins are flowing (to or away from exchanges) are a good indication from which side spot pressure is building. The order book heat maps all look the same: they are empty (on both sides). Visible liquidity is vanishing. But nevertheless, the price has upward pressure, which is driven by "market" buy orders. The biggest contributors to this are Grayscale, PayPal, and (to a certain degree) still MicroStrategy. The coin flow is clear and point in one direction only (and this for almost the past 12 months). The buyers are accumulating and transfering their holdings to wallets away from exchanges.

Here's coin movement data from Glassnodestudio:

Heat map data from TradingLite:

Binance

Bitstamp

Bitfinex

Coinbase

I know, this is a lot of data to digest, and to me, it is still not conclusive enough to call a blow-off top. But the first signs are here indicating that we are indeed in overheated territory. The best trade in my view is still to either turn some perpetual basis positions into term basis positions, or to open a short-term basis position to play a potential correction.

What about coin rotation? This is a more medium-term trade, or rather an investment decision (and not a trading decision). The timing of rotating some of your bitcoin gains (or even holdings) into other coins depends on your ability of using them for yield farming. If you can move some into the DeFi sector, it makes perfect sense to me. If not, your opportunity costs might be pretty high (depending on how much higher the price of bitcoin will go). It is definitely not an easy decision; it is almost like trying to call the top.

The trading desk of Crypto Finance is ready to rock 'n' roll, and we are happy to talk about all crypto trading topics with you.

And with that, we say... Happy Trading!