Cumberland is commenting on the recent volatility and potential opportunities to take advantage of it.
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Crypto has bounced slightly over the weekend, primarily driven by retail flow, with BTC recovering off a Friday low of $81k back to above $86k. At these levels, there seems to be attention towards dip-buying from more casual crypto observers, as BTC is now essentially back to the level it saw in early April. Over the past three months, crypto has fared much worse than other risk assets; SPs are down around 1% over the period, and BTC is down almost 25%. There are a few factors here: first, BTC was essentially unchanged in Sep+Oct, while SPs were upticking (and Gold was surging); second, as equities have started to move towards risk-off in the past few weeks, BTC’s move down has been faster. It does seem as if the period where crypto idiosyncratically underperforms other risk markets could be coming to a close, and at this point all eyes are on macro. Last week was a bit of a roller coaster, but it was quite revealing just how nervous the market was in front of NVDA earnings; the fears around the AI bubble potentially popping seem to be the sword hanging over the head of the market. Their earnings beat gave the market a sense of relief instead of optimism, and the Fed’s Williams comments on Friday, suggesting there was room for a near-term rate cut, helped bolster the market going into the weekend. Equities have opened up slightly this morning, putting crypto on a slightly more sound footing.
The other major factor here is the potential unwind of the DAT structures. As we’ve discussed here before, DATs make sense: there are market structure reasons that some DATs can be a better vehicle to get exposure to an asset than holding the asset itself. However, having numerous DATs per asset does not make sense over time, and so over the past month or so, we’ve seen DAT growth slow, and in some cases we’ve seen DATs with low mNAVs selling their underlying asset in order to buy back shares. In the run-up of the DATs, it was hypothesized that strong DATs (mNAVs above 1) would purchase weak DATs in order to increase their digital asset holdings per share. We may still see that, and in fact it seems likely: acquiring a company which is trading at a discounted mNAV buys more digital assets than buying the asset itself. However, we’re in a period right now where even the strong DATs have been slowing down their purchases, so we haven’t yet seen any acquisitions.
Why is this so important? The rally in cryptoassets this year was arguably driven by DATs, so an unwind now could risk moving the market back lower. On April 15th, BTC was $86k, within 1% of where it is right now. On the same day, ETH was $1600. Over the next four months, ETH tripled, with very little fundamental or narrative change outside the rise of ETH DATs. Looking at the price today, with BTC back at $86k, ETH is down quite a bit from the peak (we all feel it!) but the gap between its current level ($2800) and the April price ($1600) feels like the DAT effect. It’s not likely that ETH DATs will disappear completely: there are vehicles that are large enough that it feels like the market could consolidate into them. But this does seem like the largest downside risk outside of the macro. Where this could be problematic for the market as a whole is in the alts space. For the most part, in the L1 and L2 sector, ETH was the fastest horse in the race between April and September. Other tokens rallied, but could not keep up with ETH, which at the start of September was up 200%, while the next-best L1/L2 token was “only” up 100% (ARB). Basically: the alts had a beta of less than 1 on the rally. It was a different story on the way down: since September, ETH is down 36%, but most L1/L2 tokens are performing worse, generally down 40-60%. In a way, it looks similar to BTC’s struggles over the past few months: a low beta on the rally and a high beta on the selloff. There have been pockets of outperformance to Beta recently, most notably privacy tokens, but in general alts have been on the back foot.
In OTC, we have been seeing increased volumes in SOL, HYPE, ASTER, and CC. Happy Trading!
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