Vol Commentary: Bounce or Breakdown?

Cumberland is commenting on the recent volatility and potential opportunities to take advantage of it.

For further information about Cumberland, please visit Cumberland website here.

Crypto has bounced slightly over the weekend, primarily driven by retail flow, with BTC recovering off a Friday low of $81k back to above $86k. At these levels, there seems to be attention towards dip-buying from more casual crypto observers, as BTC is now essentially back to the level it saw in early April. Over the past three months, crypto has fared much worse than other risk assets; SPs are down around 1% over the period, and BTC is down almost 25%. There are a few factors here: first, BTC was essentially unchanged in Sep+Oct, while SPs were upticking (and Gold was surging); second, as equities have started to move towards risk-off in the past few weeks, BTC’s move down has been faster. It does seem as if the period where crypto idiosyncratically underperforms other risk markets could be coming to a close, and at this point all eyes are on macro. Last week was a bit of a roller coaster, but it was quite revealing just how nervous the market was in front of NVDA earnings; the fears around the AI bubble potentially popping seem to be the sword hanging over the head of the market. Their earnings beat gave the market a sense of relief instead of optimism, and the Fed’s Williams comments on Friday, suggesting there was room for a near-term rate cut, helped bolster the market going into the weekend. Equities have opened up slightly this morning, putting crypto on a slightly more sound footing.

The other major factor here is the potential unwind of the DAT structures. As we’ve discussed here before, DATs make sense: there are market structure reasons that some DATs can be a better vehicle to get exposure to an asset than holding the asset itself. However, having numerous DATs per asset does not make sense over time, and so over the past month or so, we’ve seen DAT growth slow, and in some cases we’ve seen DATs with low mNAVs selling their underlying asset in order to buy back shares. In the run-up of the DATs, it was hypothesized that strong DATs (mNAVs above 1) would purchase weak DATs in order to increase their digital asset holdings per share. We may still see that, and in fact it seems likely: acquiring a company which is trading at a discounted mNAV buys more digital assets than buying the asset itself. However, we’re in a period right now where even the strong DATs have been slowing down their purchases, so we haven’t yet seen any acquisitions.

Why is this so important? The rally in cryptoassets this year was arguably driven by DATs, so an unwind now could risk moving the market back lower. On April 15th, BTC was $86k, within 1% of where it is right now. On the same day, ETH was $1600. Over the next four months, ETH tripled, with very little fundamental or narrative change outside the rise of ETH DATs. Looking at the price today, with BTC back at $86k, ETH is down quite a bit from the peak (we all feel it!) but the gap between its current level ($2800) and the April price ($1600) feels like the DAT effect. It’s not likely that ETH DATs will disappear completely: there are vehicles that are large enough that it feels like the market could consolidate into them. But this does seem like the largest downside risk outside of the macro. Where this could be problematic for the market as a whole is in the alts space. For the most part, in the L1 and L2 sector, ETH was the fastest horse in the race between April and September. Other tokens rallied, but could not keep up with ETH, which at the start of September was up 200%, while the next-best L1/L2 token was “only” up 100% (ARB). Basically: the alts had a beta of less than 1 on the rally. It was a different story on the way down: since September, ETH is down 36%, but most L1/L2 tokens are performing worse, generally down 40-60%. In a way, it looks similar to BTC’s struggles over the past few months: a low beta on the rally and a high beta on the selloff. There have been pockets of outperformance to Beta recently, most notably privacy tokens, but in general alts have been on the back foot.

In OTC, we have been seeing increased volumes in SOL, HYPE, ASTER, and CC. Happy Trading!

Disclaimer

The information (“Information”) provided by Cumberland DRW LLC and its affiliated or related companies (collectively, “Cumberland”), either in this document or otherwise, is for informational purposes only and is provided without charge. Cumberland is a principal trading firm; it is not and does not act as a fiduciary or adviser, or in any similar capacity, in providing the Information, and the Information may not be relied upon as investment, financial, legal, tax, regulatory, or any other type of advice. The Information has not been prepared or tailored to address, and may not be suitable or appropriate for the particular financial needs, circumstances, or requirements of any person, and it should not be the basis for making any investment or transaction decision. THE INFORMATION IS NOT A RECOMMENDATION TO ENGAGE IN ANY TRANSACTION.

If any person elects to enter into transactions with Cumberland, whether as a result of the Information or otherwise, Cumberland will enter into such transactions as principal only and will act solely in its own best interests, which may be adverse to the interests of such person. Before entering into any such transaction, you should conduct your own research and obtain your own advice as to whether the transaction is appropriate for your specific circumstances. In addition, any person wishing to enter into transactions with Cumberland must satisfy Cumberland’s eligibility requirements. Cumberland may be subject to certain conflicts of interest in connection with the provision of the Information. For example, Cumberland may, but does not necessarily, hold or control positions in the cryptoasset(s) discussed in the Information, and transactions entered into by Cumberland could affect the relevant markets in ways that are adverse to a counterparty of Cumberland. Cumberland may engage in transactions in a manner inconsistent with the views expressed in the Information.

Cumberland makes no representations or warranties (express or implied) regarding, nor shall it have any responsibility or liability for the accuracy, adequacy, timeliness, or completeness of, the Information, and no representation is made or is to be implied that the Information will remain unchanged. Cumberland undertakes no duty to amend, correct, update, or otherwise supplement the Information. The virtual currency industry is subject to a range of risks, including but not limited to: price volatility, limited liquidity, limited and incomplete information regarding certain instruments, products, or cryptoassets, and a still emerging and evolving regulatory environment. The past performance of any instruments, products, or cryptoassets addressed in the Information is not a guide to future performance, nor is it a reliable indicator of future results or performance. Investing in virtual currencies involves significant risks and is not appropriate for many investors, including those without significant investment experience and capacity to assume significant risks.

The Monetary Authority of Singapore (“MAS”) requires Cumberland SG Pte. Ltd. to provide this risk warning to you. Before you: (a) pay or transfer your Digital Payment Token (‘DPT’) service provider any money or DPT; (b) enter into an agreement with a third party to buy or sell DPTs upon inducement by your DPT service provider; (c) enter into an agreement with a third party under an arrangement by your DPT service provider for the transmission of DPTs; (d) pay a third party any money or DPT under an arrangement by your DPT service provider for the transmission of DPTs; or (e) transfer any digital payment token instrument to your DPT service provider, you should be aware of the following:

1. Cumberland SG Pte. Ltd. is exempted by MAS from holding a license to provide DPT services while its license application is pending with MAS. Please note that you may not be able to recover all the money or DPTs you paid to a DPT service provider, or any other third party referred to above, if the DPT service provider’s or the third party’s business fails.

2. You should not transact in a DPT if you are not familiar with the DPT. This includes how the DPT is created, and how the DPT you intend to transact is transferred or held by your DPT service provider.

3. You should be aware that the value of DPTs may fluctuate greatly. You should buy DPTs only if you are prepared to accept the risk of losing all of the money you put into such tokens.

4. You should be aware that your DPT service provider, as part of its license to provide DPT services, may offer services related to DPTs which are promoted as having a stable value, commonly known as “stablecoins.”

Cumberland New York is licensed to engage in virtual currency business activity by the New York State Department of Financial Services.

AUTHOR(S)

RECENT ARTICLES