By @foreignative
‘Hello Darkness, My Old Friend’. I imagine this has been on a few traders’ playlists recently.
Once again beta takes centre stage as BTC continues to exhibit dominance, dictating the ebb and flow of the entire market. In this writeup we’ll explore Vol action, touch on DOVs (without mentioning them by name) and probably ask more questions than you care to answer. Hope you’re sitting comfortably as I attempt to exhaust my thesaurus de novo.
Let’s begin with the fact that although BTC is down 10% on the week with 99% 1wk realised vol (Fig 1.), the rest of the market has exhibited realised vol in excess of 100% over the same period (Fig 2.) highlighting not only the prevailing high beta environment but also the overall correlation between ALTs and their forebearer.
Interestingly, the correlation coefficient between BTC and the S&P 500 continues to lurch higher, coming in around 0.4. Suggesting BTC, and the digital asset market at large, are increasingly moving in lockstep with traditional centralised markets. Ironically, it looks like the decentralised world will continue looking to the established centralised system for ‘guidance’.
A topic that was brought to my attention by the much-revered captain of the SS Laevitas is the apparent incongruence between the ongoing liquidation and prior cascades. Take May’s collapse for example, ETH saw a 61% plunge, while the present decline boasts a 55% displacement from Nov highs. Combine this with the 60% additional open interest (Fig 3.) in Nov (USD 7bn across the top 3 venues), reduced overall funding (Fig 4.) and subdued reaction from Vol (IV sat south of 90% for most of Dec/Jan across the curve vs almost kissing 160% back in May (Fig 5.)) and it begins to look like the most recent liquidation may have been spot driven i.e., less Degen behaviour.
This begs the question how will markets react once Power Perps are adopted? In short, these products fuse perp-like simplicity with option-like convexity and are touted as attractive alternatives to the linear exposure of margin trading/perps. Does focus then shift from S/L hunting to funding bleed outs? An exciting area ripe for exploration which we will visit soon….cough dev team.
Yesterday’s dip in ETH towards 2150 saw the curve invert with the near end screeching skyward (Fig 6).
Pricing appears to be returning to earth perhaps nudged by MMs who sold into elevated levels ahead of the now weekly occurrence. About that which shall not be named, as MMs are forced to collect gamma and hedge out vega in the majors (ETH/BTC and soon, SOL), does this lead to sustained erosion of the IV/RV spread across the entire curve? (Fig 7.)
Further, with price action suppressed whilst MMs are long gamma, generating pnl must be a trying endeavour. I wouldn’t be surprised if previously headline-grabbing yields begin to fall as distributions narrow and MMs adjust bids to compensate for the difficulty inherent in hoarding gamma in such a range bound environment.
Humour me here with one more chain of questions before I relinquish your attention; with institutions moving into the digital asset space at an increasing rate, several rate hikes priced in and ongoing, if not expansive vol suppression in the majors, do we then see potential for a shift of focus and consequently a decoupling vis-à-vis ALTs season? If so, might it be the Gaming or NFT sector? Perhaps L1s resume their charge? Monitor and track individual sectors while viewing granular detail on individual assets via the Derivs Dashboard tool.
