What We See in the Markets: On the Turn

With BTC up 30% in the past two weeks, it’s pretty fair to say that the market dynamic has changed significantly, so we wanted to take a big step back. “The Turn” is a term often thrown around on trading desks, signifying the moment when the dynamic fully flips. Unfortunately, it’s usually a term used in hindsight (and even more unfortunately, it’s usually a trader explaining to their boss that they missed the turn…); it’s difficult to tell if the market is turning in the moment, or if it’s just a headfake. It’s hard to tell if the move of the past two weeks is false optimism, or the beginning of a rally that will last the next eighteen months. However, it’s been a significant enough change that it merits stepping back and investigating priors. The story of 2022 was a crash driven by irresponsible optimism and unsavory practices in 2021. The story in the first ten months of 2023 was a slow recovery that nonetheless still felt like a bear market. No matter what happens next, that chapter seems to be closing now. One thing has definitely changed: for the past two years, the path of least resistance has been lower, but the path of least resistance seems to now be higher.

The first overused adage we want to visit is “Buy the Rumor, sell the News”. This strategy often works; if a company is widely rumored to beat earnings, smart money will flow in, and the market will rally into the earnings call. The earnings will come out positive, but there are no buyers; the traders who trade around earnings are not just not buying, they’re actually selling. Where this logic breaks is when the News actually drives flow. This is important in the case of an ETF; the reason the entire market is excited about a spot ETF is that it will unlock a significant amount of BTC buyside flow that up until now, has not had access to spot BTC. This is the crowd that doesn’t have a relationship with a digital asset custodian, doesn’t have an exchange account or a relationship with an OTC desk, and doesn’t want to think about futures-style ETF. More importantly… this crowd is big, with RIAs and pension funds included. It’s not known what percentage of this wallet will flow into a BTC spot ETF, but even a small percentage makes a big difference in the net flows coming into crypto; this makes it difficult News to fade.

Next, it’s important to check your Beta assumptions. Typically, smaller market cap coins have higher Betas, meaning a 5% rally in BTC should lead to, say, a 7% rally in ETH and a 10% rally in APT. That’s generally most true when extrinsic (macro, equity) factors are moving all risk assets. However, when there are specific catalysts about an asset, Betas break down. It’s worth inspecting your own thesis about where you think BTC and ETH are going, because if the thesis is BTC or ETH specific, it may not flow to Betas the way it normally would. Betas can be a valuable tool; if you think the market is a whole is going up, it’s more capital-efficient to hold something with a high Beta. However, if the thesis is that a BTC spot ETF is going to push flows into BTC, holding something with traditionally higher Beta could cause a trader to miss the bulk of the move.

Next, it’s clear that equity matters less—at the moment. Cross-asset correlations have definitely broken down, and again, that makes sense when we have a BTC (and possibly ETH) -specific catalyst. This lack of cross-asset correlation could continue until the end of the year, but if equities have a major move, we could be unpleasantly reminded that they exist. Crypto becomes a risk asset at the extremes. If the tech sector, which seems to be in a slightly precarious place, falls out of bed in a meaningful way, it will be hard for crypto to ignore it. It could change the direction of the path of least resistance.

Finally, it’s worth having a mental taxonomy of what coins in the space are investible by different cohorts and traders. What are the assets that can be held by treasuries? What are the assets that institutions can build on? What are the assets that TradFi Funds love? Which ones do Crypto Funds trade? Which coins are driven by Retail? Having these mental categorizations helps turn a landscape thesis into a trade thesis, which is a useful tool in a new market environment.

Happy trading!