Bitcoin Options Offer Convexity Amidst Deteriorating Fundamentals

[Xangle Digest]

※This article contains content originally published by a third party on August 3, 2023. Please refer to the bottom of the article for the copyright notice regarding this content. 

※ This is a summary of the weekly research published by Matrixport on August 3rd.

 

Executive Summary

After several months of improvement, crypto fundamentals have started to weaken again. We could argue that Ether’s fair value is closer to $1,000/$1,200 based on current TVL and revenue numbers. While we are not predicting such a decline, investors should carefully guard their positions and capital. They should take advantage of the cheap convexity that the low option prices currently offer investors.

Trading is all about attractive risk-reward opportunities, and the calmness that keeps Bitcoin pinned at $29,000 will not last long. The latest data indicated that TVL dropped back to $40.5bn for the DeFi industry, notably driven by the exploitation of the Curve Finance protocol a few days ago. As a reference point and because Ethereum has been closely correlated to TVL data, Ether prices traded at $1,200 at the beginning of the year and are +53% higher, arguably without improving TVL or other fundamental data points.

Transaction revenues and fees have also underperformed this year as DeFi usage has declined without the attractiveness of competitive yields to traditional financial markets that DeFi offered. NFT minting is nearly nonexistent. Ether’s fair value appears closer to $1,000 or -46% lower than current prices ($1,839) when comparing Ether prices to the transaction revenues of the Ethereum network.

Hence, we continue to express a slightly more cautious view for the remaining weeks of the summer and expect another strategic buying opportunity to present itself, potentially in September. Traders could use the collapse in implied volatility and buy cheap optionality - either calls or puts, as it is just a matter of time before crypto prices move.

The Bollinger Bands, a signal that measures the range of prices and how far prices are overbought/oversold from the moving average, indicates that a significant move could occur at any moment.

Exhibit: Our Bitcoin Greed & Fear index shows that Bitcoin could lose momentum

Source: Matrixport Technologies

Our Greed & Fear index continues to trade lower, signalling that Bitcoin prices (and Ethereum) could continue to decline. We prefer to see Bitcoin (and Ethereum) higher towards the end of the year, but we are entering a challenging period where investors must protect their capital.

This is not the time to be complacent.

 

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