Crypto derivatives market color #2

Volatility is a trending topic with S&P500 currently more volatile than bitcoin! In today’s comment, we look at what options market taught us in October as well as who could be the largest options “consumers”.

Investors’ expectations have reset meaningfully in October

Bitcoin realized volatility versus the US dollar has been drifting lower all year - currently moving only 1.5% on average a day. This level of calmness was last experienced in 2016.

Figure 1 — Bitcoin daily realized volatility (one month observation window)

Implied volatility - the market expectation for volatility embedded in the price of bitcoin options - has also decreased a long way and is now trading at historical lows.

The market is currently pricing-in a 2.3% daily move for BTCUSD compared to a record high of 8.5% at the start of the year.

Figure 2 — Bitcoin daily implied volatility (three months maturity)

Investors are now expecting the current period of calm will extend well into next year. Prices of bitcoin options expiring in June 2019 have come down significantly - in particular the upside strikes. The market assigns a 19% probability of bitcoin being above $10,000 by end of June next year versus 27% at the start of October.

The probability of making new all-time-highs by June 2019 (breaching $20,000) - an event that some prominent investors consider as likely in the first half of next year - is only 4%.

Figure 3 — BTCUSD market probability distribution on 28th of June 2019

Most of the options selling came from call selling over the last month as investors finally capitulate on a short term bitcoin rally. As a result, the “skew” - the price of puts relative to calls for a given maturity - is starting to rise.

Figure 4 — XBTUSD price candles vs volumes

Who could trade options?

With $5m of average daily notional traded, the crypto options market is only at the very beginning. As a comparison, options on S&P500 trade an average notional of $390bn a day.

We often get asked who would trade cryptocurrency options. Looking at how traditional markets developed, we find that derivatives markets rose in Chicago in the 19th century to answer the hedging needs of American grain farmers.

Successful derivatives products - futures, options or more sophisticated ones - share in common that they answer a demand for hedging and risk management. If the market functions properly, it allows economy stakeholders to neutralise undesired exposure and scale their businesses (see The Futures by Emily Lambert if you are interested by this topic).

Looking at the cryptocurrency economy, we find needs for hedging in a number of areas:

  • Economic actors

Cryptocurrency “producers” - miners, exchanges, ICO projects - have limited tools to risk manage their positions. More than $25bn of natural selling flows could be much better handled.

Figure 5 — Natural flows (Sep17 to Sep18)

Cryptocurrency “consumers” - merchants & customers - are struggling to embrace the product because prices and fees are too unpredictable. If Amazon or another global merchant is one day to accept bitcoin as a payment currency on its platform, it will need to have at its disposal multiple hedging tools.

Figure 6 — Average spot moves and Tx fees (Sep17 to Sep18)
Figure 7 — Daily average Tx fees

Looking at Bitmex’s XBTUSD volumes versus the volatility of bitcoin (measured by the size of daily candles), it is quite apparent that cryptocurrency exchanges are long volatility and could benefit from a vol selling program.

Figure 8 — XBTUSD price candles vs volumes
  • Investors

All those hedging flows would need to be matched by investors or other economic actors willing or in need to take the other side. On the investors side, we currently see two areas for growth which are already well established in the gold market.

In the last 12 months, almost ~9m of all BTCs were inactive, just shy of 50% of the outstanding supply. A meaningful part of bitcoin investors - “hodlers” - believe in the store of value narrative and are holding bitcoins for the very long term. Those investors don’t have access to “saving” or “yield enhancement” products to optimize their holdings.

What if we could improve the “1 BTC today = 1 BTC in one year” mantra to “1 BTC today = 1.1 BTC in one year”?

Figure 9 — Inactive BTCs

Finally, macro/crypto hedge funds - short-term speculators - cannot play market catalysts with only futures and physical bitcoins (forks, regulatory approvals, etc.). A typical trade for a macro hedge fund could be to buy calls on bitcoin if he anticipates a systemic financial event - like the failure of a large bank for instance.

Most of those flows would materialize by abundant and relentless selling of upside calls which would supply plenty of volatility to the market and could potentially tame the volatility of bitcoin - at least on the upside. We see this type of market structure for S&P500 and Gold for instance. That’s a story for another post!

Thanks for reading us and please let us know your feedbacks!

Also, you can access most of our derivatives related analytics on our website: as well as our daily observations on twitter (@skew_markets).

The skew team

Sources for underlying data: Cryptocompare, Deribit, Bitinfocharts,, Etherscan, Bitmex, Coinmetrics

Disclaimer: this article is intended for informational purposes only. The views expressed herein are not and should not be construed as legal or investment advice or recommendations. Investors should do their own due diligence, with consideration given to their specific financial circumstances, investment objectives, and risk tolerance before investing. The individuals contributing to this article have positions in some or all of the assets discussed. This article is neither an offer, nor the solicitation of an offer, to buy or sell any of the assets mentioned herein.