Holiday Markets

The Holidays are always a stressful time of year, but this year has been a doozy so far, and it’s not even Christmas yet. Across almost all capital markets, one of the hallmarks of the Holiday season is a reduction in volume and liquidity. In traditional finance markets this is usually a result of several factors, probably the most important of which is that dealers and banks want to make sure that their positions and balance sheet look nice and tidy for a snapshot taken the night of December 31^st. This means that trading desks are discouraged from taking on any new large positions into the end of the year, and in the same vein are encouraged to try to close out of open positions. When a hedge fund client comes to a trading desk to make a large trade in the waning days of December, the trader is much less likely to be willing to warehouse any of the risk by taking the other side of the trade and then working out of it slowly, and instead will just plow the trade right into the market. Combine this with the fact that many liquidity providers are in a similar risk averse place, and the result is that trades can have an outsized impact on prices, as liquidity providers play hot potato just trying to stay flat.

Not Quite A “Santa Claus Rally”

In benign market conditions this type of dynamic can lead to the oft cited “Santa Claus rally” as even a small buying imbalance can lead to a relentless move higher in markets. But this year we entered December in anything but benign market conditions. And so the turmoil that has followed the emergence of the Omicron Variant, the acceleration of Fed monetary policy tightening, the back and forth of the fate of the Biden administration’s Build Back Better plan, and just about anything else that could have happened has all been directed to trading desks who don’t want to take the other side of any trades, and who’s traders have all just been sent home from the office due to the rapid surge of Covid in New York City in the past 2 weeks. The result has been a bipolar market, flipping from mania to depression from one trade to the next.

Bitcoin Volatility Low As Equity Volatility Increases

Crypto has gotten somewhat caught up in the turmoil, but in other ways has broken some of its correlation with equity markets. Surprisingly, as equity volatility, especially in tech stocks, has exploded in recent weeks, Bitcoin (“BTC”) volatility has been compressed to historic lows. Part of this is because Bitcoin volatility tends to increase on rallies and decrease on consolidations, whereas equity volatility compresses on rallies and ramps up on selloffs. But perhaps part of this is because liquidity providers in the crypto world don’t worry about the song and dance of balance sheet window dressing that their counterparts in the traditional finance world adhere to, and so liquidity in crypto markets remains closer to normal conditions. Watching the relative movements between BTC and stocks like NVDA on a day-to-day basis, suddenly BTC doesn’t look any riskier than some market favorite stocks.

Which List Is Crypto On?

So, if your crypto portfolio is oscillating back and forth between the naughty and nice list, know that your counterparts in the stock market are feeling the same thing, maybe to an even greater extent than you are. With some discipline during this time, you can navigate through the holidays and start 2022 off with a portfolio you’re confident in for the long term.

The opinions expressed in the CrossTower Classroom are those of the author(s) and not necessarily that of CrossTower. We appreciate diverse perspectives of our employees and we thank them for having a voice.