With seemingly every major bank launching its own regular periodic research report and/or analysis on the state of the crypto industry, last week UBS joined the fray when in addition to its Crypto Compass note published by the bank’s FX team, it also sent out an inaugural Crypto Keys note in which it asked whether ether will steal bitcoin’s crown as the king of cryptocurrencies. According to the note’s author, Moritz Diller, “many believe this is inevitable, especially after ETH 2.0 ushers in the shift to proof-of-stake next year and as DeFi interest builds.” However, UBS is less sure, as “each represents a different value proposition and use case while facing its own challenges and indeed challengers.”
While there are various, and numerous, considerations listed by UBS on the topic of the “flippening” or that moment when ether overtakes bitcoin, in its latest report UBS focuses on two key factors that could determine the price of the 2nd largest cryptocurrency in coming weeks.
First, looking at the downside risk, Diller writes that “what should give bulls pause is active addresses failing to show any signs of fresh life. These start from a much higher point than bitcoin, which also looks decidedly lackluster here.”
And yet the bearish case is not that clear-cut: as UBS notes, traditionally such demand-side indicators of network effects are the most powerful predictors of future price movements. However, what’s occurring instead is that “prices have been lifted largely by HODLing effects, as volumes of ETH sent to exchanges—typically in order to be sold—are plumbing to year-to-date lows.”
In other words, while activity may be declining sale activity is declining even more, as “believers are squirreling it away.”
To UBS, such behavior may account for not just ether’s correlation break with FANG-type stocks but an increasingly pronounced inverse relationship.
UBS conclusion is that while it would be a stretch to say one was being used to hedge the other, it does represent “an intriguing proposition that platforms like Ethereum could represent a strategic threat to established tech.” It also validates what Goldman said back in May when the bank initiated on crypto with a much more favorable view of ETH calling it the “amazon of information“, while panning bitcoin as a “one trick pony.”
UBS next looks at the vol space which has seen substantial turbulence in recent months, and where as spot rallied so did implied vol, especially at the 3month point where vols rose by over 10 handles for both.
Whereas such a move would routinely cause the term structure to flatten or even invert, instead the opposite happened with mid-to-longer dated tenors not only trading in premium but near historic realized extremes.
But this is where the similarities end between the markets for bitcoin and ether, and as UBS observes, “whereas BTC option volumes are hovering around their one year average, which is consistent with periods of upward moving prices, ETH interest stands at levels only seen during May’s sharp sell-off” when the ETH crash sparked a flood of option-driven flows.
UBS then spots the same pattern in skews, where both flipped to favor calls at the end of July but are now diverging on the back of even stronger topside demand in ETH. In other words, while traders are clearly bullish on the crypto space, they see far more upside for ETH in coming weeks.
What could be behind this? Here is UBS’ view:
We’d surmise things aren’t particularly frothy or one-sided but are probably undergoing a reappraisal in terms of medium-term expectations, particularly for ETH. This may reflect reduced retail flow while other market participants are extending their investment horizon—and spending more premium—in anticipation of increased institutional adoption in the fall when US futures-based ETFs may finally get the nod.
To this we will only add that there is always the possibility of a gamma squeeze in crypto which is lifting spot prices even as overall active addresses shrink. If so, a quick look at the option strikes by market price for BTC and ETH reveals that while Bitcoin’s most active strike is not too far from the current price, some around $50,000, the “max gamma” for Ether is far higher and it could send the crypto currency as high as $6,000, or double the current price, should a gamma squeeze emerge as that’s roughly where the most active – by far strike – is to be found.
