First Mover Americas: Bitcoin in Stasis Ahead of Powell Speech; Coinbase’s cbETH Trades At Discount to Ether

This article originally appeared in First Mover, CoinDesk’s daily newsletter putting the latest moves in crypto markets in context. Subscribe to get it in your inbox every day.

Bitcoin traded in familiar ranges with the U.S. stock futures slipped as investors awaited Federal Reserve Chair Jerome Powell’s speech in Jackson Hole, Wyoming.

The leading cryptocurrency wavered between $21,000 and $22,000. Ether, the second-largest cryptocurrency, suffered a 4% drop to $1,620 before bouncing back to $1,700.

The S&P 500 futures declined by 0.2%, tracking moderate losses in the European stocks. The dollar index held steady around 108.30 as the U.S. 10-year Treasury yield bounced three basis points to 3.07%, recovering part of Thursday’s decline.

Perhaps investors lightened risky positions, bracing for hawkish or anti-inflation and pro-liquidity tightening comments from Powell. Observers told CoinDesk that the dollar might drop once Powell begins talking, allowing for a bounce in the risk assets.

“Fed Chair Powell’s speech at Jackson Hole (10 am ET) is much anticipated. Going into it, the Fed funds futures are pricing in about a 70% chance of a 75 bp hike next month,” Marc Chandler, chief market strategist at Bannockburn Global Forex, wrote in the daily market update. “The market has a habit of hearing Powell dovishly and later corrects itself.”

Some analysts said Fed’s balance sheet shrinkage is a bigger headwind to risk assets, including cryptocurrencies, than what Powell says or does with interest rates.

“Fed Balance sheet rolling over in downward trend as concern grows about the ability to run it off (via quantitative tightening). This slope down is met with weaker crypto prices as our thesis predicts,” Decentral Park Capital said in its Telegram-based research channel. “We continue to see this as a fundamental headwind for crypto assets and risk markets in general.”

In other news, decentralized finance (DeFi) protocol Synthetix’s founder proposed capping the supply of the platform’s native SNX tokens to 300 million. The SNX token traded 8% higher.

Singapore-based troubled crypto exchange Zipmex appointed the Australia-based restructuring firm KordaMentha to assist with reorganizing the company and preserving assets.

Japan is considering a tax reform proposal to lure crypto startups to remain in the country. Per the proposal, crypto startups that issue their own tokens will be exempt from paying taxes on unrealized gains, starting

cbETH trades at discount

On Wednesday, cryptocurrency exchange Coinbase unveiled its new liquid token called Wrapped Ethereum Staking or cbETH, representing staked ETH plus all of its accrued interest.

At press time, the token traded at a discount of around 8% to the spot price, per data source coingecko. Lido’s stETH token, the biggest staked ether token, has been trading at a discount to ether’s spot price since the collapse of Terra’s stablecoin UST in May.

Note that Coinbase’s cbETH and Lido’s stETH tokens representing staked ether are not supposed to trade 1:1 with ether.

Here is what observers said when asked about possible reasons for the discount in cbETH:

CK Cheung, an investment analyst at DeFiance Capital:

“The discount reflects the opportunity cost of missing out on potential forked PoW ETH tokens. Both ETH Sept and Dec futures are trading at a discount too.”

Shiliang Tang, chief investment officer at digital asset investment firm LedgerPrime:

“The discount perhaps reflects concerns about staking through a centralized exchange. Also, there’s less you can do with Coinbase cbETH than Lido’s stETH onchain.”

Ina Unsworth, researcher at Binance.US, tweeted:

“On-chain traders could be of the opinion that cbETH should trade at a discount given all the permisioned aspects of the contract.”

Large Ether Traders Position for Volatility Spike as Merge Draws Near

Taking unhedged or hedged directional bets on an asset’s price is seen by some as the most exciting trading strategy in financial markets. And ether (ETH) traders have been doing exactly that ahead of the impending upgrade, known as the Merge, of the cryptocurrency’s parent blockchain, Ethereum.

Institutions seems to be adopting an options trading strategy called a long strangle, which is indifferent to the direction in which the cryptocurrency moves and instead aims to make a profit from the degree of price turbulence or volatility.

“Block traders have also started betting on a volatility spike in ether,” Griffin Ardern, a volatility trader from crypto asset management firm Blofin, said, drawing attention to large strangle trades that crossed the tape on dominant crypto options exchange Deribit in the past 24 hours.

A long strangle involves buying both call and put options with similar expiries. Buying a call – or the right to buy the underlying asset at a preset price – is akin to purchasing insurance against bullish moves by paying a premium upfront to whoever is selling the option. Buying a put – or the right to sell the asset at a predetermined price – is analogous to purchasing protection against price slides. Buying both protects against volatility.

The strategy makes money when the asset price swings enough in either direction to make the call or put more valuable than the total premium paid to purchase both options. The strategy bleeds money when the asset is little changed, reducing the demand for and prices of options.

Potential Double Top on The Dollar Index