IN THIS ISSUE

✴️ Nakamoto has Arrived
💰 USDh yield recap
🎥 Hermetica Hangout: UTXO
📈 Weekly market review

Like what you see? Join our exclusive, ever-growing community on Discord and take part in future product launches:

Nakamoto has Arrived

Hermits, the Nakamoto Upgrade has finally arrived, setting a new standard for Bitcoin Layer 2s! With block confirmations now under 10 seconds—lightning fast compared to Bitcoin’s 10-minute blocks—Stacks is racing ahead. Coupled with Bitcoin finality, Stacks now aligns even closer with Bitcoin’s security, making transactions on Stacks as permanent as those on Bitcoin itself; reversing one is as hard as reversing a Bitcoin transaction.

What's next:

Want to learn more?

Check out the official Nakamoto blog post from the Stacks Foundation.

USDh Yield Recap

Bitcoin-backed and yield-packed. This week sUSDh holders just took home a 15% APY.

Stake USDh and let your Bitcoin dollars work for you. 

Hermetica Hangout: UTXO

Circle November 5th on your calendar. Our next Hermetica Hangout features UTXO—a behemoth in the Bitcoin space and our first VC guest!

UTXO will join us to talk:

Follow the Hermetica X account, and turn on notifications so you don’t miss this one.

Market Review

Price continues to crawl beneath ATHs, currently sitting at $71,350.

The moving averages (MA) in Figure 1 are:

• 7-Day MA: $70,257

• 30-Day MA: $66,130

• 180-Day MA: $63,408

• 360-Day MA: $57,619

• 200-Week MA: $40,473

Price is well above all moving averages save for the 7-Day MA, which price is directly on top of. Two weeks ago the price decisively broke above the 180-day MA at $63,000, which was required to put price back into a bullish trend. As it is now, the MAs are signaling a bullish stance despite a pull back from ATHs on Halloween yesterday. If the 30-Day MA and 180-Day MA cross over price from below that would invalidate this bullish stance.

Bitcoin was within $1000 of all-time highs (ATHs) this week and had the highest monthly close on record. Bitcoin now sits on the $70,000 support. In only two weeks, Bitcoin price has crossed above all MAs and sits poised to pass ATHs at $74,000. If Bitcoin breaks above the ATHs on high volume and stays above that level for a week, we can conclude that we’ve entered a new bull market. The current structure based on price levels is thus bullish.

However, every week that price fails to break ATHs decreases the probability of a breakthrough and increases the probability that price will test lows again. Therefore, every week from here on out decreases the breakout probability by 5%. Currently, our subjective probability sits at 80% that prices will pass all-time highs ($74,000) by year end. Should the price increase, we can estimate the upside price levels where the price is likely to meet resistance at $72,000, and $74,000.

However, if the trend breakout fails, then we estimate support levels to be at: $70,000, $68,000, $66,000, $64,000, $61,000, $60,000, $55,000, and $49,000.

Bitcoin returns are currently at:

• 1 month: 15.84%

• 3 months: 15.68%

• 6 months: 9.77%

• 12 months: 101.19%

Annual returns on Bitcoin remain very high at 101.19% despite prices being roughly flat over the last 9 months. Bitcoin’s 1-year return will remain high until the October 2023 - February 2024 prices fall off the data set. In the last week, Bitcoin’s trailing annual returns rose from 76.14% to 101.19%, largely due to the rally last week.

Periods of above-average returns are typically followed by periods of below-average returns. In Bitcoin’s case, traders are still capturing profit from the run-up late last year. However, now that we have suffered below average returns for 9 months and older high-return data is falling out of the dataset, this metric will soon turn bullish. Given the bullish readings from other metrics and macro events, the timing couldn’t be more precinct for this metric to also turn bullish. As of now, this signal is neutral but is expected to turn bullish by the end of November, assuming an ATH breakout doesn’t occur before then.

BTC ETF Flows

Net BTC ETF inflows since last Friday were $2.68 billion.

It was a big week for Bitcoin ETF flows. Average daily flows were $535.42 million. Inflows on Wednesday (market top) were $893.3 million - the largest daily inflows since the last ATH push in March of this year.

As often seems to be the case, Bitcoin price peaked this week on the same day net ETF inflows peaked. Once ETF inflows cease, sellers gain the upper hand, and the price tends to settle into a downtrend.

Volatility

Bitcoin's implied volatility (DVOL) is currently at 58.71%. DVOL is currently at the 72.2 percentile.

DVOL remains low despite the price approaching ATHs this week. Market makers’ positions typically benefit from moving back to the center of a long-term range, as their short option positions would move further out of the money. Surprisingly, DVOL has not responded positively to the recent rally. This could be interpreted in a few ways: demand for options might be limited relative to market maker liquidity; market makers could be net long delta, minimizing their concern over rising prices; or they may anticipate a mean reversion, expecting the price to settle back toward the long-term range.

To understand this better, we need to examine other derivative metrics. The put/call ratio has modestly increased from 0.43 to about 0.47 since the start of October, with the highest put/call ratios being concentrated on closer expirations. This indicates that there is more interest in puts than in previous weeks. If this was caused by traders buying puts (perhaps as a hedge against a spot position), then market makers would need to short perps or front-month futures to hedge out their positions. However, the opposite appears to have happened. The futures curve is in a high demand orientation indicating that market makers are, if anything, forced to buy perps or futures due to higher put selling.

Based on this information, it’s clear that market maker positioning isn’t the main driver behind the bullish market trend, which accounts for why DVOL remains low despite other bullish signals in derivative metrics, like futures positioning. It’s more likely that the bullish futures curve is being influenced by significant spot buying in other markets, prompting market makers to hedge their short spot delta with perpetuals and standard futures.

Basis Spread

The basis spread, or the price of a futures contract over its spot price, is positive across all maturities and has risen from 10.5% to about 11.25% on average over the last week, and from 7.5% to the current 11.25% in only a month. Market participants are adding more to their long positions while prices are not rising, thus increasing systematic leverage. This leveraging is paving the way for a major realized price move and an implied volatility blowout in the next few weeks. The question is whether it will be a bullish breakout or a crash. Given the orientation of other metrics, we would speculate a breakout is the more likely result.

The futures curve is in an inverted contango from the front month (November 29th) onward. Front month (November 29th) APR is higher than all other maturities. The basis falls continuously from the front month (November 29th) to the September 2025 expiration in a smooth curve. There is about a 1.5% difference between the lowest and highest-yielding maturities. The spread between maturities has been widening (indicating curve steepening) over the last few weeks, though it was not nearly as steep as it was this Wednesday. A steep, downward-sloping contango indicates that demand for closer maturities is outstripping supply and has become detached from Bitcoin’s long-run APR. The more detached close maturities become, the more bullish the market is on near-term price action.

Bullish Bitcoin futures curves are typically special inverted contangos (Figure 6), where the front month has the highest APR, which then decreases with each subsequent maturity, though APR remains positive along the entire curve. This is roughly how the curve looks today.

This is the most bullish curve in the short term, as market makers use the front month as a substitute for perps and spot during periods of high demand.

Macro

In September, the Federal Reserve announced their first 50-basis point (bp) cut in the Fed Funds Rate; the range of rates that banks are incentivized to lend to each other overnight. Prediction markets put the odds that the Fed would cut 50 bp at 53% and 25 bp at 47% prior to the announcement. By cutting 50 bp in one meeting rather than the more conservative 25 bp, Powell is signaling that he made a mistake by not starting the rate-cutting cycle earlier. So far, markets (especially precious metals) have reacted well to the 50 bp cut, but that could reverse quickly if signs of a financial crisis or recession begin to appear in Q4. Typically, by the time the Fed cuts, there is a strong undercurrent of deflation in the economy, making it too late to prevent a recession with mild monetary stimulus.

Other central banks are following the U.S.’s lead and have now begun easing monetary policy. The Chinese government announced a stimulus package on September 24th, which took effect on October 7th. This package includes a policy rate cut, mortgage rate cuts, and 800 billion yuan ($114 billion) in support for the stock market.

Last Tuesday, the Chinese media company Caixin reported that the PRC is considering issuing 6 trillion yuan in central government bonds. The funds raised from the bond sales are expected to stimulate the Chinese economy through consumer handouts, local-government refinancing, and 1 trillion yuan for bank recapitalization.

The Hong Kong stock exchange was up a blistering 30% in a month, a performance notable even by Bitcoin’s standards. This marks a major sea change in Chinese monetary and fiscal policy, which has been extremely restrictive since 2020. Consequently, Chinese easing is a huge boon to global liquidity.

The US presidential election is next Tuesday. Historically, elections have suppressed positive price action and heightened volatility in the months leading up to the event. Fund managers will typically reduce risk into exogenous “events” that could impact their portfolios, which involves reducing position sizes and conserving cash. This event risk, coupled with fund managers’ reluctance to take excessive risks near year-end to protect their bonuses, often makes election years challenging for financial asset performance. Once the election passes, however, all sidelined capital will come rushing back into markets, suppressing volatility and elevating prices. Markets clearly tried front running the post-election move at the start of October, but now that the election is less than a week away, markets are showing risk-off behavior, resulting in increased market turbulence.

Betting markets, such as the crypto native Polymarket, have seen huge volumes in the last few weeks. Open positions for the main presidential election winner card now numbers over $2 billion.

Election markets have moved decisively in Trump’s favor over the last month, shifting from roughly tied with Kamala Harris to approximately a 60/40 spread. This spread widened to 67/33 early this week but has since tightened. Notably, Trump’s odds were highest when crypto was peaking. Given Trump’s favorable stance on crypto, this could have contributed to Bitcoin’s positive performance this week, though likely not as a major factor. Bitcoin’s price would likely rise regardless of who is elected. The larger dampening effect on price stems from the event itself, as previously noted.

S&P 500 implied volatility (VIX) currently stands at 19.29, while US Treasury implied volatility continues to rise, now sitting at 135.18. Equity volatility reached a new local high this week but appears to be easing. In contrast, bond volatility hit a multi-month high, reflecting concerns over future interest rates. Speculation suggests that rates may decline more slowly than the relatively large Fed cut in September would imply, leading to a bond sell-off, which in turn increases bond rates and volatility. It’s possible that Trump’s lead in polls and betting markets—given his likelihood to cut taxes and increase military spending, potentially inflating real prices—is contributing to this bond volatility spike. We expect volatility to continue rising, peaking just before the election, then falling sharply unless a true conflict emerges between Israel and Iran.

Sincerely,
The Hermetica Team