Excell with Options: Positioning for the Ethereum Merge
Executive summary
The Ethereum Merge is coming, and ether prices have bounced significantly after recent crypto weakness – showing indecision in the market. Will there be a spark or will activity fizzle out? In this issue, Rich explores a Micro Ether option condor trading strategy.
There have been many ebbs and flows to the cryptocurrency market through the years. One common theme that has attracted both retail and institutional investors is the relationship and intuition that if global central bankers debase fiat currencies with ultra-easy monetary policy, there should be more upward movement of cryptocurrencies. We can see the relationship between M2 money supply year-over-year growth and the price moves in bitcoin and ether (Figure 1). Monetary policy acts with a lag, but sure enough, as M2 growth accelerated, the prices of each moved higher. Then, as M2 growth slowed down, there was downward pressure on bitcoin and ether.
Figure 1: M2 money supply versus Bitcoin and Ether prices
Taking this a step further, as more rate hikes this year are priced into the SOFR futures curve and as this easy policy is removed, prices in Cryptocurrency futures have moved lower as well. Seen as ‘long duration’ assets given there is little near-term cash flow and most fundamental value is ascribed to future growth, cryptocurrencies should not be expected to do well in an era of rising rates, the same way longer-dated fixed income, credit instruments or high-growth tech stocks should not, either.
Figure 2: SOFR One year forward future prices versus bitcoin and ether prices
Based on the hawkish speech by FOMC Chairman Powell at Jackson Hole, we should expect even more pressure for the Fed Funds Target Rate to move higher. This has had an inverse correlation with money supply growth. Thus, we should expect money supply growth to continue to slow, putting even more pressure on cryptocurrencies.