Vol Commentary: Challenging Month

Cumberland is commenting on the recent volatility and potential opportunities to take advantage of it.

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June has been a challenging month for crypto markets; BTC and ETH are both down around 8%, as a bit of pre-Summer ennui has crept into what has otherwise been a phenomenal year for both assets; even after June, both assets are up about 50% on the year. A drawdown after a sharp rally should always be expected, and with stocks pushing to new highs, a rate ease later in the year seeming likely, and an ETH ETF on the way, BTC and ETH holders seem, for the most part, fairly unstressed.

The stress, however, is in the alts market. The first issue is that while BTC and ETH have lost 8% in June, alts are down significantly more on the month, typically between 20 and 30%. This feels like Beta– more volatile assets tend to do worse in downtrending markets—but it’s not. If it were just Beta to blame, we would’ve seen outperformance in these assets earlier in the year, on the way up, but we didn’t see this. Alts underperformed BTC and ETH on the rally, and also underperformed on the selloff; a really ugly state within a correlated asset class. At the beginning of June, with BTC and ETH both +60% and near their local highs, assets like OP, ARB, MATIC, ATOM, AVAX, and APT were all down between 10% and 40% on the year, and June has brought all of them lower.

A few weeks ago, we highlighted a problem with L2 tokens; there are too many of them. Not from a governance standpoint, but from a market cap standpoint. The capital pool being distributed to these L2 tokens is not growing, but the number of tokens available has been. Looking at the performance of all alts this month, one has to wonder if the same can be said of L1 tokens, or even alts writ large. Even in the midst of crypto becoming more mainstream investible (which is certainly happening), it is unclear if more capital is being unlocked for assets outside of BTC and ETH. I’m not being cute here: it’s really unclear.

• There is absolutely more capital being unlocked for crypto. But it is mostly the “can only invest in regulated products” crowd, and all of that is flowing into BTC, and is expected to flow into ETH once the ETF launches

• We might expect some wealth effect as a result of BTC and ETH rallies. Crypto investors are richer, and we would normally expect them to rotate some of their gains further down the risk curve: into NFTs and into ALTs. We haven’t seen much evidence of this.

• BTC and ETH are special here because they’re on the right side of a meaningful moat. The question, the, becomes “Who else can cross the moat?” There are certainly some candidates– SOL, DOGE, even BCH or LTC—but none of it feels like a this-year thing.

This puts crypto funds managers in a challenging spot. It’s extremely hard to outperform the benchmark (BTC) right now, and thanks to ETFs, the benchmark is now widely available for about 25 bps. We’ve seen many traders shift strategies to options, where they can stay in BTC and ETH markets but trade with leverage, and in particular there has been significant volume going through in calls, even in the midst of this month’s downtick.