Alpha Hunt — July 9
What if a demon were to creep in on you one night, in your loneliest loneliness, and say, “This life which you live must be lived by you once again and infinite times more … ”
— Friedrich Wilhelm Nietzsche, German philosopher
If Nietzsche were alive today, he’d be delighted to learn that the crypto community is putting his philosophy of amor fati to actual practice and embracing the cyclical bouts of euphoria/depression to the fullest.
And just as quickly as we’ve gone into a mini Q2 “winter,” market sentiment now appears to be leaning bullish. Can this upward trend be sustained?
Production Assets Finally Get Some Love
Like clockwork, the DeFi sector has been marking the anniversary of 2020’s DeFi Summer by outperforming the broad market. Axie Infinity (technically more within the gaming and NFT verticals) is breaking the ATHs and heralded for leading the long-awaited DeFi fundamental re-rate.
Fundamentally, on a longer-term sales-adjusted basis, the market is placing a higher premium on protocols outside of the typical blue chips — newer segments such as Eth2 staking, scaling solutions, and Uni v3 strategy vaults.
Bear in mind, though, that these ratios are only useful as rough guides, and are woefully inadequate when it comes to comparing protocol valuation, due to protocol-idiosyncratic factors like tokenomics, revenue estimation variance, and other variables.
Source: Token Terminal
EIP 1559: The Big Daddy of Protocol Upgrades
ETH/BTC price action is all you need to gauge excitement surrounding EIP 1559, currently slated for mainnet launch on Aug. 4, 2021. With Flashbots and even more upcoming scaling solutions — will the deflationary asset theme be undermined?
ETH options traders appear to be pricing in EIP 1559 as well, with volatility from August onward still trading at significant premiums, despite the collapse in the front end.
Look Toward the Futures
The futures complex, however, isn’t pricing in much bullishness. We’re nowhere near the levels of euphoria seen earlier this year, and future OI levels need to be much higher.
FUD regarding upcoming GBTC unlocks is also particularly strange, since these private placements were typically done as one leg of a pair trade, the other leg being short BTC.
Given that the latter has to be unwound, the unlocks would create buying pressure instead of the opposite. We can already see this happening with CME-leveraged fund short interest rising rapidly.
If history is any guide, the month-long consolidation of IV should result in volatility once again spiking across the board. Going long on verticals or ratio spreads isn’t a bad idea, at current skew levels.