Cryptos: Great Hedge Against the Stock Market Decline
CME: Micro ETH Futures ( 
MET1!), Micro BTC Futures ( 
MBT1!)
On March 29th, I published this trade idea: “Crypto Staged a Strong Comeback in Q1.” At the time, bitcoin was quoted $28,348, up $11,800 or +71.3% year-to-date. The main driver was flight-to-safety when a series of US bank failures shocked the financial markets.
On July 17th, I published a follow-up idea, “Crypto Bull Market Appears to Take Hold.” Bitcoin was closed at $30,146, up 1,798 or +6.3% since the first report.
While the 80%+ gain in the First Half had been remarkable, bitcoin was still 56.2% off its record high of $68,789. As price remerged above the critical 30K mark, investor confidence returned. I suggested that bitcoin would continue to rise.
Last Saturday, spot bitcoin price was settled at $34,090. The leading cryptocurrency is up $17,542, or +106.0% YTD in 2023. Current price is 20.3% higher since I wrote the first idea, and up 13.1% further since I published the 2nd report.
Ethereum, the other leading crypto currency, closed at 1,801 on Sunday, up 50.5% YTD.
Key Drivers for Crypto’s Recent Rises
In my opinion, the rising bitcoin prices could be attributed to the following:
Firstly, strong law enforcement helps investor regain trust in cryptocurrencies.
For a long time, bad actors found ways to steal investor’s money, even though the sector was built on blockchain technologies designed to safeguard crypto assets. This year, the SEC fined Binance, the largest crypto Exchange. Public trial of the founder of FTX, the defunct second largest Exchange, sent strong signals of investor protection.
Secondly, crypto market benefits from investors rotating assets out of stocks.
In the First Half, the S&P 500 was up 15% while the Nasdaq rose 38%. However, the boom in market indexes was a mirage, rather than a real broad-based bull market.
The S&P did not behave like a well-diversified stock market index. The “Magnificent Seven”, which include Nvidia, Apple, Tesla, Microsoft, Google, Meta, and Amazon, represent 30% of the entire index and were up 60%, driven largely by the AI hype. At the same time, the remaining 493 companies were up only 3%. Altogether, the S&P 500 was up 15.8% as of June 15th. Similar phenomenon occurred at the Nasdaq index.
In previously writings, I reasoned with my readers that the US stock indexes could no longer carry the heavy weight of hundreds of mediocre stocks. Rising interest rates eventually caught up with them. An average company saw its market value decline as prescribed by the Discounted Cash Flow stock valuation method.
Since the Federal Reserve turned hawkish in recent weeks, investors became more pessimistic and began taking out stock market profits. On October 27th, the S&P closed at 4,117, a 10.3% drawdown from its yearly high of 4,589. The Nasdaq, at 12,643, was down 11.9% from 14,358. Both indexes are officially in the bear market territory.
Meanwhile, bitcoin was up 16.6% in the last three months. Trade volume data suggests that investors are putting money into cryptos.
• Coinbase market data shows that its bitcoin trading volume in October averaged $15.2 billion, up 35% from September and up 21% from Q3 average.
• The S&P 500 traded 3.8 billion shares per day in October, up only 2.8% from September and up just 1.1% from Q3 average.
Thirdly, the Israeli-Hamas conflict triggers a flight to safety. Investors moved money out of risky assets and into relatively safe assets, including gold, US dollar, and cryptos.
• Since October 6th, COMEX gold futures were up 10.2%. At $2,016 per troy ounce, this is the first market close above 2K in over five months.
• Dollar Index was last closed at 106.58, up 0.5% for the same period and up 3.0% YTD.
• Bitcoin was up 24.2% while Ether rose 9.4% since the Gaza War broke out.
Finally, growing expectations that the SEC will authorize exchange-traded funds investing directly in bitcoin pushed it up by more than 25% over the past two weeks. If materialized, this momentum could form the biggest price breakout in years for cryptos.
Trading with Micro BTC and ETH Futures
In my opinion, the above price drivers will run their courses in coming months, giving solid support for the crypto market. However, having a bullish view is easy, putting money on something already doubling in price is quite hard. In crypto investment, choosing the right instrument will make a big difference.
Neither the physical bitcoin nor the bitcoin ETFs offer any leverage. When price goes up, it will take a larger dollar increase to get the same investment return. For example, when bitcoin was trading at $20,000, a price hike of $10,000 represents a 50% return. When bitcoin rose to 40K, a 50% return will require 20K in price increase.
CME Micro BTC futures (MMBT) provide leverage and capital efficiency. Contract notional is 1/10 of 1 BTC. Initial margin is $750. November contract was last settled on $3,409.5. At current price there is a 4.5 times leverage built in the contract, which is the ratio of 3,409.5 divided by 750. If futures price goes up 10% to 3,750.45, the price gain of 340.95 would be a 45.5% return, using the $750 initial margin as a cost base.
In my view, Ether has more room to grow comparing to Bitcoin. In the past five years, Ether price closely tracked that of Bitcoin. In 2023, Ether lagged Bitcoin performance. Its 50% YTD gain, while extraordinary, is just half the return Bitcoin managed to gain.
The ETF fund expectation has a direct impact on bitcoin, but also helps pull the entire crypto market up as it inspires investor enthusiasm. Ether’s lower price, at about 1/19th of a bitcoin, would be more attractive to value investors. At the end, if one crypto ETF is approved, there will be more. ETF funds on Ether could be next.
CME Micro Ether futures (
MET) provide leverage and capital efficiency. Contract notional is 1/10 of 1 ETH. Initial margin is $49. November contract was last settled on $179. At current price there is a 3.6 times leverage built in the contract, which is the ratio of 179 divided by 49. If futures price goes up 10% to 196.9, the price gain of 17.9 would be a 36.5% return, using the $49 initial margin as a cost base.
Warning: Cryptocurrencies and all financial instruments based on the value of cryptos are highly risky investment.
Happy Trading.
Disclaimers
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme/
MET1!), Micro BTC Futures ( MBT1!)On March 29th, I published this trade idea: “Crypto Staged a Strong Comeback in Q1.” At the time, bitcoin was quoted $28,348, up $11,800 or +71.3% year-to-date. The main driver was flight-to-safety when a series of US bank failures shocked the financial markets.
On July 17th, I published a follow-up idea, “Crypto Bull Market Appears to Take Hold.” Bitcoin was closed at $30,146, up 1,798 or +6.3% since the first report.
While the 80%+ gain in the First Half had been remarkable, bitcoin was still 56.2% off its record high of $68,789. As price remerged above the critical 30K mark, investor confidence returned. I suggested that bitcoin would continue to rise.
Last Saturday, spot bitcoin price was settled at $34,090. The leading cryptocurrency is up $17,542, or +106.0% YTD in 2023. Current price is 20.3% higher since I wrote the first idea, and up 13.1% further since I published the 2nd report.
Ethereum, the other leading crypto currency, closed at 1,801 on Sunday, up 50.5% YTD.
Key Drivers for Crypto’s Recent Rises
In my opinion, the rising bitcoin prices could be attributed to the following:
Firstly, strong law enforcement helps investor regain trust in cryptocurrencies.
For a long time, bad actors found ways to steal investor’s money, even though the sector was built on blockchain technologies designed to safeguard crypto assets. This year, the SEC fined Binance, the largest crypto Exchange. Public trial of the founder of FTX, the defunct second largest Exchange, sent strong signals of investor protection.
Secondly, crypto market benefits from investors rotating assets out of stocks.
In the First Half, the S&P 500 was up 15% while the Nasdaq rose 38%. However, the boom in market indexes was a mirage, rather than a real broad-based bull market.
The S&P did not behave like a well-diversified stock market index. The “Magnificent Seven”, which include Nvidia, Apple, Tesla, Microsoft, Google, Meta, and Amazon, represent 30% of the entire index and were up 60%, driven largely by the AI hype. At the same time, the remaining 493 companies were up only 3%. Altogether, the S&P 500 was up 15.8% as of June 15th. Similar phenomenon occurred at the Nasdaq index.
In previously writings, I reasoned with my readers that the US stock indexes could no longer carry the heavy weight of hundreds of mediocre stocks. Rising interest rates eventually caught up with them. An average company saw its market value decline as prescribed by the Discounted Cash Flow stock valuation method.
Since the Federal Reserve turned hawkish in recent weeks, investors became more pessimistic and began taking out stock market profits. On October 27th, the S&P closed at 4,117, a 10.3% drawdown from its yearly high of 4,589. The Nasdaq, at 12,643, was down 11.9% from 14,358. Both indexes are officially in the bear market territory.
Meanwhile, bitcoin was up 16.6% in the last three months. Trade volume data suggests that investors are putting money into cryptos.
• Coinbase market data shows that its bitcoin trading volume in October averaged $15.2 billion, up 35% from September and up 21% from Q3 average.
• The S&P 500 traded 3.8 billion shares per day in October, up only 2.8% from September and up just 1.1% from Q3 average.
Thirdly, the Israeli-Hamas conflict triggers a flight to safety. Investors moved money out of risky assets and into relatively safe assets, including gold, US dollar, and cryptos.
• Since October 6th, COMEX gold futures were up 10.2%. At $2,016 per troy ounce, this is the first market close above 2K in over five months.
• Dollar Index was last closed at 106.58, up 0.5% for the same period and up 3.0% YTD.
• Bitcoin was up 24.2% while Ether rose 9.4% since the Gaza War broke out.
Finally, growing expectations that the SEC will authorize exchange-traded funds investing directly in bitcoin pushed it up by more than 25% over the past two weeks. If materialized, this momentum could form the biggest price breakout in years for cryptos.
Trading with Micro BTC and ETH Futures
In my opinion, the above price drivers will run their courses in coming months, giving solid support for the crypto market. However, having a bullish view is easy, putting money on something already doubling in price is quite hard. In crypto investment, choosing the right instrument will make a big difference.
Neither the physical bitcoin nor the bitcoin ETFs offer any leverage. When price goes up, it will take a larger dollar increase to get the same investment return. For example, when bitcoin was trading at $20,000, a price hike of $10,000 represents a 50% return. When bitcoin rose to 40K, a 50% return will require 20K in price increase.
CME Micro BTC futures (MMBT) provide leverage and capital efficiency. Contract notional is 1/10 of 1 BTC. Initial margin is $750. November contract was last settled on $3,409.5. At current price there is a 4.5 times leverage built in the contract, which is the ratio of 3,409.5 divided by 750. If futures price goes up 10% to 3,750.45, the price gain of 340.95 would be a 45.5% return, using the $750 initial margin as a cost base.
In my view, Ether has more room to grow comparing to Bitcoin. In the past five years, Ether price closely tracked that of Bitcoin. In 2023, Ether lagged Bitcoin performance. Its 50% YTD gain, while extraordinary, is just half the return Bitcoin managed to gain.
The ETF fund expectation has a direct impact on bitcoin, but also helps pull the entire crypto market up as it inspires investor enthusiasm. Ether’s lower price, at about 1/19th of a bitcoin, would be more attractive to value investors. At the end, if one crypto ETF is approved, there will be more. ETF funds on Ether could be next.
CME Micro Ether futures (
MET) provide leverage and capital efficiency. Contract notional is 1/10 of 1 ETH. Initial margin is $49. November contract was last settled on $179. At current price there is a 3.6 times leverage built in the contract, which is the ratio of 179 divided by 49. If futures price goes up 10% to 196.9, the price gain of 17.9 would be a 36.5% return, using the $49 initial margin as a cost base. Warning: Cryptocurrencies and all financial instruments based on the value of cryptos are highly risky investment.
Happy Trading.
Disclaimers
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme/
Jim W. Huang, CFA
jimwenhuang@gmail.com
jimwenhuang@gmail.com
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