Excell with Options: Spreading bitcoin and ether using relative value trades
Executive summary
In this report, Rich Excell looks at recent trends in the bitcoin and ether markets and discusses a call option strategy to spread these cryptocurrencies as a way to manage potential risks.
Image 1: Bitcoin spot price daily candle chart
After almost six months of consolidation, the price of bitcoin and other cryptocurrencies has potentially broken down in the past week or so. This often prompts the question for those that follow the space: “What should I do here?” Should a trader look to trade out of the position due to falling prices? What if the trader is a HODLer? Should they ever sell?
In my years running a hedge fund, I was prompted with similar questions multiple times a year regardless of the asset class I was trading, and I had to handle different macro situations.
In the chart above, one can see that bitcoin price has fallen and looks to be holding the one-year moving average for now, while simultaneously being in the oversold area on the RSI. Does this mean it is time to add?
Image 2: Ether spot price daily candle chart
The price of ether has also fallen and is in oversold territory on the RSI. One difference here is that it has not held the one-year moving average like bitcoin has. That said, this moving average has not defined ether as much as bitcoin. One area of support it has held is the channel it’s been in for the last six months. Given the almost doubling off the lows of last year, this current channel might be defined as a bullish flag pattern such that holding within this channel could become quite a bullish development. Does this mean one should look to add to ether instead of bitcoin? I think more perspective may be needed.
Image 3: Multi-line chart of bitcoin & ether overlaid versus offshore Chinese yuan and Japanese yen (both inverted)
A large portion of the volume of bitcoin, ether, and other coins are traded during Asian hours. Asia traders and investors have found more use cases for the coins, and the markets are often much more liquid in Asian hours. Thus, it is important to consider how Asian investors are thinking about recent moves.
To start this discussion, I want to compare the bitcoin and ether moves to the moves we have seen in CNH (offshore Chinese yuan) and Japanese yen. The spot prices I used above were dollar prices. However, Asian traders will be looking at price in their local currencies. As I can see from the overlay chart here, the weakness seen in bitcoin and ether is matched by that seen in CNH and JPY. In fact, for the past 20 months, these products have been moving in lockstep with each other. If anything, as I look at late 2022, I can see that it moves toward stronger local currencies in China and Japan that led the move in bitcoin and ether. Now, we may be seeing the opposite, as weakness in these currencies could in fact be prompting the move lower in crypto.