Image 1: Bitcoin spot price daily candle chart

Image 1: Bitcoin spot price daily candle chart
Source: Bloomberg

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

Image 2: Ether spot price daily candle chart
Source: Bloomberg

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)

Image 3: Multi-line chart of bitcoin & ether overlaid versus offshore Chinese yuan and Japanese yen (both inverted)
Source: Bloomberg

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. 

Image 4: Daily candle chart of bitcoin/yen cross

Image 4: Daily candle chart of bitcoin/yen cross
Source: Bloomberg

Image 5: Daily candle chart of ether/yen cross

Image 6: Ichimoku cloud chart of bitcoin/ether cross rate

Image 7: Overlay chart of bitcoin/ether cross rate and 10-year U.S. Treasury yields

Image 8: Commitment of Traders report for Bitcoin and Ether futures

Image 9: Implied and historical (realized) volatility for the generic front-month Bitcoin futures

Image 10: Implied and historical (realized) volatility for the generic front-month Ether futures

Image 11: Implied volatility term structure for both Bitcoin and Ether options on futures

Image 12: Bitcoin implied volatility surface

Image 13: Implied volatility surface for Ether options

Image 14: Expected return for a short October 29,000 Bitcoin call option

Image 15: Expected return for long 16 Ether October 1800 calls