Crypto services provider Matrixport suggests collecting a premium by selling bitcoin call options and using the same to fund the purchase of ether calls.

Trading cryptocurrencies is quite challenging right now, as the market is caught between opposing forces of issues at crypto-friendly bank Silvergate, operational bottlenecks at major exchanges and optimism about Ethereum’s impending Shanghai upgrade.

Per crypto services provider Matrixport, the best way to navigate the melee is by setting relative value trades – a strategy of trading one or more securities in relation to another.

“It’s time for relative value trades. Traders can now buy call options on ether and finance them by selling calls on bitcoin with the profit potential quite strong,” Markus Thielen, head of research and strategy at Matrixport, said in a note to clients on Tuesday. “This allows traders to buy a high-volatility asset (ether) for the price of a lower-volatility asset (bitcoin).”

Options are derivative contracts that give the holder the right, but not the obligation, to buy or sell the underlying asset at a predetermined price on or before a specific date. A call option gives the right to buy, while the put option confers the right to sell.

Buying a call/put option is akin to purchasing insurance against bullish/bearish moves. The buyer compensates the seller for offering protection by paying a premium while taking the trade.

Matrixport’s suggestion involves collecting a premium by selling a bitcoin (BTC) call option and using the same to fund the purchase of an ether (ETH) call option.

The trade idea is based on the assumption that the spread between the annualized 30-day realized or historical volatility of ether and bitcoin would bounce from the current unusually low level. That, coupled with the upcoming Ethereum Shanghai upgrade, would make ether calls pricier relative to bitcoin calls.

“The volatility spread between ether and bitcoin has compressed to below 1. This has only occasionally happened and the spread has traded above 1 in 93% of the observations during the past four years,” Thielen noted.

Volatility is mean-reverting and has a positive impact on options prices. In other words, periods of unusually low volatility are followed by increased price turbulence, which, in turn, boosts demand for options, making them pricier. Thus, traders tend to buy options when volatility is lower than its long-term average.

The spread between ether and bitcoin realized volatility gauges looks undervalued relative to its historical standards and could mean-revert as we head into the Shanghai upgrade, which is expected to bring price turbulence.

“The spread has averaged 1.39 over the year and offers great risk/reward potential here,” Thielen noted, explaining the rationale behind purchasing ETH calls by selling BTC calls.

The Shanghai upgrade, a backward-incompatible hard fork due sometime in the coming weeks, will open withdrawals of ether staked in the Ethereum network since December 2020. The upgrade will de-risk staking and increase capital efficiency, opening doors for more investor participation and perhaps ether price gain.

“A wave of new participants who had previously been watching from the sidelines can potentially add a level of buying pressure to ETH, especially if institutional capital can be enticed,” Binance Research said in a report last month.

The post Ether Call Options Look Attractive Relative to Bitcoin as Volatility Spread Dwindles appeared first on Crypto Insider.

Crypto investors should cut exposure by 50% if bitcoin prices fall below $22,800, the report said.

Matrixport, a crypto exchange and lending platform, said it has been bullish on digital assets since mid-December, but signals from the U.S. economy are now forcing it to be more cautious.

In a research report published early Friday, the firm said it is still not the time to be outright bearish, but suggested cutting exposure by 50% if bitcoin (BTC) prices fall below $22,800. The largest cryptocurrency by market cap slumped overnight and was trading around $22,400 at publication time.

U.S. stock markets have started to sell off again and U.S. bond yields are moving higher, the note said. The 2-year Treasury now yields about 4.87%, above the November 2022 high of 4.8%, and the difference, or spread, between the 2-year and 10-year yields is at an “unhealthy level of -0.87%.”

The rallying U.S. dollar is another negative sign and “adds to the restrictive monetary policy overhang,” wrote Markus Thielen, head of research.

Daily crypto trading volumes have dropped to $60 billion from around $80 billion, which shows less interest from traders to engage with the crypto market, “while the ongoing outflows from Paxos-Binance (BUSD) stablecoin have resulted in the market cap declining to now $10 billion,” the report said. A stablecoin is a type of cryptocurrency whose value is pegged to another asset, such as the U.S. dollar or gold.

The 60-day correlation between bitcoin and the Nasdaq stock index is at its lowest level since December 2021, when the U.S. Federal Reserve first started to communicate to the market that interest-rate increases were on the horizon, the report noted.

“This correlation breakdown is supportive for holding long crypto exposure as investors can hold onto the future technological growth expectations while the downside from macro data appears to be more impactful for U.S. listed technology shares.”

Matrixport said it remains convinced that U.S. inflation will fall sharply this year and that as a result, the Fed will stop raising interest rates, setting up the market for a relief rally.

The post Bitcoin Bears May Still Be a Bit Early, Though Caution Urged: Matrixport appeared first on Crypto Insider.