Bitcoin, SP500, Tesla & Nvidia - April 2023
In recent discussions concerning Bitcoin, attention has been drawn to two wagers placed by Balaji S. Srinivasan, a former Chief Technical Officer at Coinbase. Mr. Srinivasan has staked one million US dollars in each of these bets, both of which involve a prediction that the price of Bitcoin will reach one million US dollars per Bitcoin within a period of ninety days.
During the past month, Bitcoin has experienced a significant surge in value, increasing from approximately 17,000 US dollars to surpass 28,000 US dollars. However, the question remains as to whether the upward trend will persist.
In my estimation, the recent influx of capital into Bitcoin is predominantly attributable to the reflexive impact of liquidity concerns within the banking industry on stable-coins, rather than any perceived risk of hyperinflation. Given that most stable-coins that have endured the crypto winter are supported by USD reserves, which are held within the traditional banking system, any perceived systemic threat to the banking industry could potentially undermine these stable-coins, such as USDT and USDC, which together represent over 110 billion USD (approximately 20% of Bitcoin's market capitalisation).
Therefore, in a scenario where fiat currency is not a viable alternative, individuals are compelled to seek the only available safe and truly decentralized option in the cryptocurrency market - Bitcoin.
To conclude my argument on Bitcoin, I must reiterate that the current rate environment carries a significant cost of carry for most participants in the space. While it is certainly possible to generate yield, particularly with the increased demand for standardized cash-settled derivatives, it is not a possibility available to all, as trust in custodial services has also been eroded.
As per Glassnode's analysis, the number of Bitcoins held on exchanges declined from roughly 2.8 million BTC in January 2022 to 2.2 million BTC by the end of December 2022.
Regarding my outlook on the SP500 index, in line with my prior post following the SVB bankruptcy, the markets have found support and even experienced marginal gains during the week that followed. In my view, this can be attributed to the extreme hedging strategies employed due to perceived systemic risk, as outlined in the article I shared here.
Meanwhile, Credit Suisse's challenges have come to light and Deutsche BankDB 0.00%↑ now appears to demonstrate significant weakness, likely stemming from their exposure to OTC derivatives - a separate issue affecting US banks.
However, the SPY 0.00%↑ 30-day implied volatility remains relatively subdued, ranking in the 34th percentile at the end of Friday, even as hedging activity continues to rise, as reported by Zackfinds.io. Given that we are still four weeks away from the next Monthly Options Expiration, the supportive charm flows are unlikely to come into effect for another two weeks.
On the other hand, the relatively low implied volatility environment coupled with an significant amount of hedging may set the stage for a potential gamma squeeze downward. In the event of an unexpected negative development that results in a surge in implied volatility, the market makers' will need to sell a considerable amount of short futures due to Vanna and could magnify the market downturn.
In summary, in an environment such as this, it would be prudent to consider reducing the portfolio's beta, at least until the Charm flows start supporting the market closer to the April Options Expiration.
To conclude the article, I would like to shed some light on TSLA 0.00%↑ and NVDA 0.00%↑. Both of these stocks have been benefiting substantially from the reflexivity of hedging flows, as they have recurrently been among the top OCC tickers in terms of option volume.
Both Tesla and Nvidia demonstrate a typical positioning, from an Open Interest perspective, of stocks that have appreciated significantly and rapidly, resulting in the obliteration of any short seller or put buyer. However, these dynamic hedging flows have now turned negative, particularly for Nvidia. As we approach the April Options Expiration, contrary to the Hedging Flows that may support the overall market, these stocks could be inversely impacted by Charm and potentially Vanna flows.
For a better understanding of Option Reflexivity and its implications on the market, I highly recommend taking a closer look at some of the articles we have previously covered in this space. From the rise of Bitcoin to the potential gamma squeeze down and the impact on Tesla and Nvidia, we have covered a wide range of topics in the financial market.
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