The big crypto ETF trade

As we enter a new year, one thing that is already quite clear from market perspective: It won't be boring and slow. Plenty of volatility is likely due to many macro events stacked on both the bullish and potentially bearish side. And most importantly: Bullish catalysts that are already priced in advance. Which makes the bearish side all but closed (downside surprises are more likely than upside).

The surprise factors to the bearish side are bigger than the bullish side in my view, especially when it comes to equity and crypto markets because over the last two months, the huge rally in both markets has been mostly about forward-pricing the easing/improving of market conditions. Inflation coming down, the rate hiking cycle is being done with rate cuts expected for 2024, and the crypto markets finally catching a breather with lush liquidity inflows as result. When market forward prices too much of bullish conditions, it creates a problem. If by any means in near future those conditions are not met and deviations in data start to happen, the market could start plunging fast. Because the bullishness was rushed.

If you have read my prior article about shipping you know that this might be rushed, because inflation is very likely to start to move higher again because of Red Sea issues. And that doesn't even consider the possibilities of recession (banking crisis), US election disruptions and internal turbolence, or geopolitical shock events with China-Taiwan. None of which are by any means bullish for global markets. Black swans are currently under the water's surface, hidden, and the chances for some to pop up are not small.

The reason for outlining this is because the ETF trade in crypto in my view is pretty much grounded in what was said above. It is a highly bullish catalyst that has already been forward-priced and discussed by the market for months. In short term at least. I should be very clear, that this is not long term view of 12 months, but specifically view for month of January/February. And why i believe that it will open a potentially good trade opportunity, so do not confuse my "priced in" reasons as long term ones.

Let's outline potential scenarios for January and reactions on the crypto market, and the best part out of all: No matter what happens on ETF news releases one can make solid trade, so stick around until the end of article.

Buy the rumor, sell the news

If you have spent any considerable time around markets you probably have heard about the "buy the rumor sell the news" phrase. It means that rumors once they become big and are discussed by plenty of sources can start to get priced in. The more the rumors are dragged (even if later completely untrue) and the more news media companies or influencers start to discuss it, the more institutional investors weight their comments on it, and the more the effect of forward-pricing-in is being done.

The inverse of that, if we think about it....what makes for the best bullish catalyst to trade on after the catalyst is released? Or what makes for the best catalyst that one buys long-term investments after the release of the catalyst with potential fast returns?

By far the biggest key is that it (1.) news has to be big, but (2.) it also has to be fresh. Surprising. Not hinted in advance or rumored in advance. Surprise element matters.

Therefore, the surprise factor plays a huge role in determining the clarity of market moves after particular catalysts. And the vice versa can be true, if something is chewed on well in advance for months, the surprise factor is gone. Big players will position in advance early on, and then use the catalyst release date as an exit event to sell their position into. They will use the influx of rushing, chasing liquidity from participants who are unaware of said above, and use that demand to sell into large positions. That's how buy the rumor sell the news (huge selloffs on release of bullish catalysts) are baked.

If you have been around crypto markets last three months tracking space closely, you know the ETF stories started pretty much in early October last year. Do you remember that huge spike and move back down in Bitcoin on 16th October (although fake news)? Yep, that was ETF mention around Blackrock's application. Regardless if it was fake, the important is that indeed Blackrock and many other companies have been pushing documentation to the SEC and planning for spot ETFs since before that date. ETF stories and actual SEC comments around it became quickly official soon after, and therefore the pricing of potential ETF approvals began.

So lets start here, is ETF surprise catalyst? Or potential implementation of one? Its not, because it has been well discussed in advance. The only thing surprising at this point would be SEC rejecting ETFs since so many expect the applications to be approved, but more about that later.

Check the sentiment of major crypto influencers

One thing I always like to do for awareness of potential large-scale market tops or market bottoms is check everyone's bias on the influencer or "expert" side. If bias is very bearish across most videos and channels, chances for the bottom increase. If bias is very bullish across the industry and content, chances for the top are pretty high. Although that factor is not very time-sensitive (plus minus 3 weeks) it tends to be a somewhat good addition to the thesis. It has served me well in 2017 and 2021 by liquidating my entire portfolio around those two bull markets, and it might be useful once more soon (altough to be forward about it have no current portfolio of crypto assets, besides the short term and mid term trades i do. Over past 3 months i am playing it strictly from trading side and not investing).

With everything said above, there is significantly more bullishness than there is skepticism about the catalyst of ETF approvals being priced in. So that's that.

Now...is it a surprise that most influencers have bullish ETF projections while making revenues by talking positively about the sector (most viewers dont want to hear bear views), the only sector on which they have exposure? Lets keep in mind that most crypto influencers are not market agnostic, they only deal with crypto and nothing else. Which makes them a lot more biased, just like gold bugs. For the same reason gold bugs will turn any global news event into very bad projections aka Armageddon, a society collapse event, how else are you going to retain the viewers over the long run? Gotta sell that affiliate bunker physical gold for listeners to stack it in.

However, if you do a more thorough search and cover many different (bit higher quality channels) which I tend to do, the overall sentiment is still highly bullish for ETF catalyst in crypto, at least in terms of price impact both short and long term. That's the key takeaway. Increased chances of short-term priced-in effect from this angle in my view.

Dont be white sheep in markets

To avoid getting bagged its all about looking left when everyone tells you to look right. Unless "everyone" is all the best players in the industry, the exceptional performers, then that might be an exception. I think everyone is looking bit too much to the one side around this particular catalyst, especially on short term. I wont disprove the reasons for long term bullishness, but short term its another story.

The completely unpriced side: SEC not approving ETFs

While I do not think there is a high probability of this happening, it is still worth always thinking about all potential scenarios that can happen at any time. Not all "possible" scenarios such as alien invasion and whatnot, but the practical possible scenarios, and SEC not approving ETFs (one of them or perhaps all of them) would not be completely unimaginable.

Now think about what that would mean. ETF approvals are at this point almost like rate hikes by FED last year in Q1 and Q2. About 90% of market analysts agree that hikes will come with certain BP projects. ETFs and certain polls and analysts' opinions that were checked pretty much agree that there is a very high chance some of those ETFs will get approved for crypto markets.

This means, that if that were not to happen and they would all be rejected, it would be a crystal clear bearish event. If you assume a good chunk of the Bitcoins bull market over the past 2 months is responsible for ETF forward pricing (I think the risk-ON cycle is by far the biggest factor, but spot ETFs cannot be underestimated in its contribution) then it wouldn't be too out of whack to see a large selloff in such case.

The reason why the above matters, is because the thin line for bullishness gets thinner the more reasons we list for short term. Meaning that approvals are already forward-priced, and also likely to happen. Therefore upside is limited on catalyst release. Meanwhile, any surprise factors open huge downside risk for the bear move, due to being highly underpriced.

Again I don't believe SEC will reject all ETFs, but if some do get rejected it could add to lesser bullish influence.

Short-term view vs long-term impact of ETF catalyst

I believe that approval of those catalysts if it happens will open up the gates for increased market cap of crypto markets over long run. Probably by quite a significant margin. It is not to be underestimated how much influence the wealthiest capital has over markets versus smaller guys. The top 5% control and hold most of the global assets in their hands. This means whether that capital has safe access to spot ETFs that are not as risky as holding custody on crypto exchanges or having some weird boomers' cold storage wallets, it definitely can open the gates for the long term. Now where I completely disagree with most is the impact of this on the short term.

Just because ETFs get approved, there won't be a massive rush of capital which will completely absorb the supply in crypto markets (as some expect). That effect will be noticeable over the long run, but in the short term most likely not as much. Or to say it otherwise, the mass of capital that was used to push crypto last month is far bigger than what the inflows from new ETFs might be in the first month following ETF approvals. That might just be the most important takeaway on the article?

Some fellas have noted how Blackrock has almost 2 billion ready to push into those ETFs from their clients if they get approved. Now... bear with me. I am bad at math. But not bad enough to do some basic numbers. Crypto is a 1.5 trillion USD market cap asset class. 2 billion is not that much relative to context. Or to keep numbers in more meaningful context:

This is how "buy the rumor sell the news" math is balanced. Look at inflow numbers ahead of catalyst, then do a quick check on potential inflows after release and check if numbers on the later part are able to outbalance the initial numbers. If they come short, by a big mile it's not a bullish sign. Because large institutions that created initial rallies are more likely to then turn sellers if the fresh numbers aren't enough in size. Now there is no guarantee to that of any sort, the only reason to point out above is to show that there are no meaningful numbers of short-term inflows that are supposed to come after ETF approval that are by any means as big as inflows in December were.

Many have listed reasons to anticipate institutional inflows into the crypto space to increase by a large degree due to the introduction of spot ETFs, opening gates for US capital markets. I agree. No doubt that this will over the long run increase inflows and increase the market cap of the entire space. But so will increase the dominance of large financial institutions inside the space that was considered the last citadel of free and decentralized markets. But hey, don't say that out loud, we know that when it comes to crypto investors and you give them a choice between Blackrock entering space and increasing volumes and upside pump % vs not doing so and keeping the market more democratic and smaller, most people would choose option one, because that option is the quicker road to Lambo. Just put your decentralization hat on like Robespierre while pretending that the main thing you care about when it comes to crypto markets is democracy and freedom that makes you sleep easier at night (while you dream about the lambo).

Crypto bull markets start very quietly and they end in an absolute frenzy

When it is early into the bull cycle, most people and influencers in the space are quiet. Content creation is low and small. And then over time, those numbers grow. The chit-chat grows. And along with it at some point, insane projections of 10X on Bitcoins move from here into the next few months. That has been the dynamics in every single cycle I have been around since the early days of crypto. Its a step by step road into insanity, you have to be very objective in assessing how deep into asylum mode the market is in (hint currently its not yet near max but getting there).

The key is to ask oneself, are we currently seeing plenty chit chat? Yes. Are there insane targets out there? Is excess bullishness out there? Kinda. It's not extreme yet. Not 2021 or 2017 territory yet. But it has grown over the past month a lot. Now strap a highly-priced catalyst (ETF) and you just might add that element to the soup that makes it super Mexican and spicy. Basically, the projection is not for a bear market of crypto going forward. But instead for high volatility, and possibly large downside move (even if the upside follows next). And that's the key, because lets highlight how this plays into potential trade to be made.

Risk off-market is not ideal for crypto in short term, nor is often regulation discussion or addition of new instruments such as ETFs. History used as a guide.

Use history as a guide they say, alright let's.

Case study 1: 2017 futures markets are introduced for crypto. It leads to a major decline and top of the market.

Case study 2: 2022 regulation catalysts plus risk-off market introduction:

Crypto goes into deep bear market in each case above. Or at least, faces plenty of volatility and struggle.

The point about highlighting both of those two as key events/years is they are highly related to the current situation (without adding any other catalysts because I think they are all noise and the above two really relate to the current situation the most). Let's break down why.

Case study 1: 2017 futures markets were highly anticipated and well chewed in advance, for weeks if not months. Rings any bells? Once those markets were introduced and all this new liquidity of margined and leveraged longs had a chance to start participating the exact opposite happened. Markets did not rally anymore, instead, they crashed. The same argument when used currently on how ETFs will open gates for institutional capital could be related to 2017 because keep in mind, back then crypto was much smaller. So the effect of new liquidity of futures market participants might just be similar to current ETF participants vs the current much bigger market cap size. Ratios could be similar. This means in the rear mirror, that the 2017 situation doesn't give us confirmations on the bull side, if anything opposite.

However, let me outline why the futures market introduction was not the answer to why crypto has topped. There is no conspiracy behind it, and believe me, I would have been the first one to look into that side if it was. The explanation is much clearer. Let's mark down when 2017 crypto topped out, and what exactly was happening to global markets at that time.

Through most of 2017 global markets and US equities were rallying. Then by the end of the year, the FED started to implement a soft rate hiking cycle (started mid-2017) and global markets reacted with somewhat of a risk-off reaction at the start of 2018. US equities started to sell off along with many other markets. On image below:

What we can notice is that the topping of crypto markets is not random at all. If you have read my prior articles on "risk profile" you know that global liquidity and risk-ON/OFF cycles drive risky markets such as cryptocurrencies. Thriving crypto markets in risk-off mode where US equity markets are tanking is just unlikely. Especially considering that US equity markets carry plenty of tech sector exposure (non crypto) just as the crypto sector in itself carries tech exposure. Making them both sensitive to global liquidity changes.

Case study 2: Now let's highlight the 2022 situation, what caused crypto to top out in early 2022? The same as what caused it to top out in 2017, global markets go into risk-off mode. Bonds crash, equities start to decline, global liquidity is pulled out of markets, and so do crypto markets crash.

As we can see Bitcoin topped out at same time:

The conclusion is that global risk-off cycles are major and the biggest contribution to why crypto bull markets end.

Let's revert the clock forward to where we are now. Into the new year of 2024, global markets shifted from risk-ON in November/December into risk-OFF in early January. Whether that will last is yet to be seen, we need several more days to confirm. But some signs of weakness are there. The dollar is strengthening once more, equities have declined, and crypto has been unable to break out and hold gains. Risk-off:

The key once more is, that if this risk-off remains present going into the ETF catalyst announcement a week from now it does not provide an ideal environment for Bitcoin to thrive. Strong dollar and weak equities historically have not been a good combination for Bitcoins' upside. But keep in mind I can't make any changes to an article over the next days, so if this cycle flows change disregard this point. If they do not, however, and remain in this risk-off sentiment then this point is valid. It adds a bearish context, not bullish.

Okay but enough about this philosophical catalyst debate, let's talk about the thing everyone comes to crypto markets: Dem monies as some Russians might say. How do we play this catalyst via futures, equity, and options markets?

Options markets

What was discussed above is just that bearish factors might be bigger than people might assume around the current catalyst. This is why there might be at least some sort of short-term plunge delivery on Bitcoins price, regardless of afterwards there is a rally.

The idea is to create a trade opportunity around that, assuming we don't know for sure which direction the market will finalize at the end of January, but we do assume one big plunge will happen in between, and potentially some rally leg as well. Plenty of volatility and most importantly large scale moves. Therefore the trade is in options in my view. Not futures, not crypto spot, not equities, but options. Big % moves in either direction without very robust clarity of exact direction should be played via options, thats what this asset class is made for.

Timing

To be specific about timing, all below trade highlights are specifically meant to be taken between January 8th and 14th. All trade suggestions are not financial advice, they are just ideas backed by certain assessments of information, and therefore up to reader to implement or not.

Trade ideas

Three types of plays:

1. Volatility extraction (neutral bias),

2. Bear play (soft),

3. Bull play (soft)

Neutral-Volatility extraction play:

https://www.investopedia.com/terms/s/straddle.asp

The main core play and the intent of this article is about volatility play (neutral price opinion), using straddle options strat. It's not about predicting if this will result in a major bullish or bearish move in crypto markets. It's not trying to outsmart everyone in the space. It's about neutral mode, which means regardless of where the market ends up going there are potentially decent Rs to be extracted if played via straddle options in either of the instruments:

-Bitcoin, Ethereum, or MARA options markets.

The reason why above, and I have excluded most of the other markets or tickers is because they do not meet certain criteria, such as:

-too low volumes

-no options markets

-etc...

An example of such trade might be: Long calls and puts both with expiry 19th January, both with strike price of 43000 on Bitcoin. Or long MARA calls and puts with expiry of 19th January and strike price of 22 (current ATM).

The idea behind this trade is to buy both calls and put options in any asset listed above of choice (BTC, ETH, or MARA) since all of them have good liquidity on options with enough flexibility. Obviously one needs access to crypto options markets to place such bets (which US participants might have problems accessing) which is why I have added MARA as such option that is accessible to everyone. And MARAs options markets are very liquid.

If we assume that ETF approval could cause plenty of volatility in the crypto market then buying options straddle would make sense, as we can profit either way. For example, if there is a big move to the upside on 10th January and then the 15th is the inverse (which I think could be the case) then we can capitalize on both call and put options, by buying them in advance. Selling calls first into a squeeze, and then selling puts into a plunge, assuming that is the sequence of the moves. And obviously one needs to purchase the right duration of such options, personally, 19th January is when I think the right expiration strike might be. And then a combination of some short-term 2-day expiries to mix things up a bit and increase the RR for those with larger appetite.

Or if there is just a straight-up squeeze with no dump, and I am mistaken about a big plunge, buying straddle options should still be able to profit one, as calls can be exercised into a squeeze, while puts expire worthless. As long as one has purchased the exact balance between puts and calls (ATMs at the same strike prices and same expirations) this should work out.

This means as long as there is a large volatile move there are potentially some gains to be made. Ideally however in my view is a scenario where both strong squeezes happen followed by a huge plunge, that would be the best combination to maximize and not letting any side expire worthless.

If you follow the above plan or use it to adjust your own plan, make sure you use the strike of options with high volumes and decent liquidity. The last thing one wants is 0 volume chain of options which does not give one flexibility to get in and out of the trade quickly.

Example of a decent volume chain of MARAs option chain and possibly one of the better picks on the list:

Whatever chain you decide to go with, if so, make sure the puts and calls match similar expiry and similar strike prices, if you want to play it safely (and have little experience). However, here is where I disagree with most. I don't think that straddles should be fully neutralized. One should have a slight bias in any event if there are enough reasons to validate bull or bear results, which means that the straddle could be slightly tilted to one side. For example, if one has a slight bear bias as in my case, the puts are a bit more aggressive and outweigh the calls by strike prices or a total number of contracts by some margin. And vice versa if one thinks this ETF catalyst event should be highly bullish.

Personally, my play will be with straddles on both Ethereum (Binance) and MARA options. And then adding elements of bearishness on top with adding a bit of OTM very cheap puts on each that outweigh the neutrality to some degree and expand net R gains in case there is a big plunge in the middle of January (regardless of where markets go after that). For example buying 2 day expiration puts, OTM on MARA (those with under 1 USD price), on the 9th January and then as well on 14th January.

Ethereum options with good expiration dates and chains on Binance:

If you are from the US and don't have access to crypto options, remember that the chains are pretty much the same for MARA stock, so just pick that instead.

I believe that even if one is a beginner trader this is one of those situations where you can experiment with a very small position on longing the straddle and be as neutral as possible, to see how this works around highly volatile events. Make sure you understand the risks of options markets and weight position carefully if so. And for those with more conviction behind this, who like me think this is very priced in an event expecting a large plunge in the middle, going from full neutral to a somewhat neutral-bearish position with a mixture of straddle+put options is the way to go in my view.

However time matters. When buying the options (to not buy too early and face declining value of the contract) make sure to be familiar with SECs potential approval dates on ETFs coming in January:

Above is the highlight of the key two dates, the first 10th of January and the second 15th. Now keep in mind those are not final yet because March is final for most of the other ETFs besides the one from ARK. But... that's not how the market will see it. The market will see SECs stamp or not on January 10th as a major signal on whether the rest ETFs are likely to follow or not. If ARK's ETF on the 10th gets rejected there will likely be a major disappointment and a bear reaction. If it gets approved, however, it will likely lead to a surge in BTC price as the market starts to anticipate that other ETFs with 2nd deadlines on the 15th might also pass into the last stages of approval.

So the 10th is an important date. It sets expectations.

Perhaps a rally after the 10th (if approved) and then a dump on the 15th after all is baked in?

Or scenario 2 if on the 10th ARK ETF is not approved it would lead to a dump.

Either way, the above two dates are the ones to position options trade around. Pre-positionon 9th, and then pre-position on 13th or 14th. Assuming volatility around.

There will be trades on spot markets and futures as well but personally, those will be highly adaptive trades so I won't be posting plans in advance. Options are where the plan can be set ahead.

If there is such a reaction in crypto, for example, a macro Type1 setup (for those familiar with my playbook) it would be an ideal reaction to extract the above-mentioned options trade:

To keep positioning summary from the personal side in brief

-Buying straddle options on Ethereum and MARA. 19th January expiration and some 12th expiration. If BTC tanks and calls expire worthless the puts might deliver 3X or more. If BTC rallies the puts could expire worthless and calls can deliver 3X. If price is range stuck with large swipes, executing/exiting each side of trade will be needed with good timing, which might be tricky.

-Buying more weighted puts OTM cheap ones in case of bear delivery, if works it's a 10R play alone on that, assuming 300 points move on Ethereum which is realistic in my view, or 5 points move on MARA.

If larger bear move does not happen and crypto rallies heavily into the end of January with no hiccups, then calls will be used to cover losses on puts and hopefully end resulting in net gain on trade, although it is true that this scenario would be much smaller and closer to break even. It should go without saying, that to make this work, calibrating position sizes and calculating how many contracts to buy on each side is extremely important. Math has to be taken seriously here else balance can too quickly tilt out.

My aim is to make a minimum of 10R on trade. Let's see.

Conclusion

In case you think I am talking out of my rear end on those projections and potential volatility with downside surprises, make sure to check my old article in 2021 about crypto bear play. That article was written to outline potential bear market in crypto might happen. Which it did soon after the article was published. Now while the projection on this one is not really about a bear market yet (that is for later this year perhaps), it's about upcoming volatility, the fact that the upside might be much more limited than expected (priced in), and the best of it all, that no matter what happens we can make some gains on trading this January situation.