A tonne to unpack from crypto markets over the past week, We will try to be as concise as possible.
“We reckon actual “extreme fear” will kick in below 40,000 in BTC or below 3,000 in ETH. We intend to keep deltas (spot position) very short if these pivot levels break.” — 9 January Market Update
Friday, 21 January, saw the full break of 40,000 in BTC and 3,000 in ETH as equities tumbled hard as well.
As expected, the desk saw tangible fear kick in:
1. Heavy stop-less selling in spot
2. Aggressive buying of gamma (short-term options) particularly from large option desks who were covering short gamma (around 3000x of BTC notional of strangles)
3. 2000x BTC of February 25,000 puts on Bit.com (an unusual size for the exchange which leads us to suspect it might be miner hedging)
Price weakness carried into the weekend and accelerated on Monday with BTC trading to 32,933 and ETH trading to 2,159. “Extreme fear” kicked in with BTC risk reversals trading below -30% (puts more expensive than calls — Chart 1).
However, later in US hours, we saw a strong bounce off the lows. BTC ended the day positive and BTC risk reversals went back above -10% (Chart 1) as downside fear turned into fear of missing the bounce. Front-end vols sold off hard as well as confidence rushed back into the markets.
The question is whether we’ve already seen the lows and it’s going to be up only from here?
We are not sure.
While front-end vols spiked hard with BTC 1-week from 70% to 100% and ETH 1-week from 85% to over 120% (Chart 2 & 3), the longer end of the vol curve remained relatively tame. The curve from March onward moved higher by only 5–6% to a very modest 75% level.
This is distinctly different from the vol reaction in May last year which saw the whole curve elevated and ETH vols trade up to 250%! Does this mean that the market has yet to reach it’s true point of pain? Below 30,000 level in BTC perhaps?
A lot of the short-term price action is going to depend on the Fed statement later today (3am SGT). Given the bloodshed in equities, chances are we that we’ll get a fairly neutral statement and market will take that as an excuse to rally. A short squeeze across the board is likely.
Positions wise, we flipped short delta on the break of the pivot levels as planned. Thankfully, we were also extremely long gamma from winning most of the DOV flows on Friday evening.
The long wings (far strike options) position that we’ve been adding to (see 20 January update) also paid off nicely as the BTC butterflies (far strike vs at-the-money options) doubled on the sharp move lower.
We’ve taken profit on a lot of our long gamma but remain quite long still into the Fed meeting. We are slightly nett long vega (longer-term options) as well now, short BTC vega against long vega in ETH and the Alts.
We are keeping our deltas (nett spot exposure) only slightly long as we do not have any longer term directional conviction at this point.