VOL is so back.
We've spilled a lot of ink in this column about the sleepiness of the crypto market, but in the back of our minds we all knew the sanguine vibes wouldn't last forever. Thursday's session was dramatic, with bitcoin falling more than 7% – erasing most of the gains we've seen since BlackRock submitted its filing for a spot bitcoin exchange-traded fund in June.
As is typically the case with crypto, it is difficult to ascribe an exact catalyst for the drawdown. One might point to market jitters tied to the bankruptcy filing of Chinese property giant Evergrande. The bankruptcy is underpinned by broader worries about a property crisis in China and a slowing economy, which also weighed on U.S. equity markets on Thursday. There was also news that Elon Musk's SpaceX wrote down its bitcoin holdings by $373 million last year and in 2021. The report also noted that the firm sold bitcoin.
Trading firms across the market were anticipating a big move for several weeks, as bitcoin waded in the doldrums with volatility and trading volumes near lows not seen in several years. As I noted on Twitter, the recent environment bears some similarities to the market in the summer of 2018 when bitcoin traded in a tight range around $6,500. Ultimately, it drew down near the $3,000 level.
Whilst this recent drawdown wasn't nearly as brutal, there were some other parrels to crypto history, as noted by crypto firm QCP. Thursday's drawdown "brought back the 2021 and 2022 ghosts of Elon-driven tops and bottoms, and we certainly hope the market will revert to those times again." The firm added that the drawdown resulted in a shift in the derivatives market into "bear extension mode."
Volatility made a big comeback with implied volatility returning to levels not seen since the meltdown of FTX, as noted by Genesis. VOL of VOL, which is a measure of how much implied volatility is moving, also surged:
Here's a relevant passage from a note sent to clients on Friday:
Notable prints included overnight ATM strikes paid at 117%, June 2024 40,000 strikes paid at 75% (and above) and ~1-month ~quarter-delta calls lifted in size at close to 60%, only to be given down some 20 points lower just hours later.
Indeed, we have to give Genesis's Gordon Grant some credit given he called for a violent break-out (either to the upside or down) in this column a few weeks ago. Still, the striking move lower happened against the backdrop of a healthier crypto ecosystem system, according to the firm. Here's the relevant passage:
Suffice it to say, moves in spot, basis, vol, skew and convexity pricing were as extreme as this market has witnessed. Yet it occurred at a time where, at least ostensibly, all has been reasonably well for the digital asset ecosystem. Unlike comparable dislocations during COVID or over the course of 2022, the cryptocurrency market has experienced, to the eyes of most, a renaissance in 2023, with a healthy rebound in prices and a secular decline in volatility, attributed to the maturation of the asset class.
Okay. So what happens next? It could be the case that the bitcoin ETF brings the market back towards $30,000, according to Grant. A court ruling in Grayscale's lawsuit against the SEC over its rejected application to upgrade its GBTC to a spot ETF had been widely expected this week, but there's not an exact deadline. The best outcome would be a win for the asset manager. As my colleague Nathan Crooks pointed out to me this morning, BTC started dropping right before 11am after Eric Balchunas of Bloomberg tweeted 12 minutes to go to the decision, and then nothing happened. That resulted in a dialing in of more risk premium. Here's Crooks:
Traders obviously like a binary option that they can trade on. But there’s always the chance that whatever ruling comes will be more complicated. And it can also likely be appealed. So people are viewing this like a Grayscale loss will mean all bitcoin ETFs will be over, but it will most likely be more complicated than that.
Balchunas now says Tuesday could be the day. We'll see.
That ambiguity could be behind the surge in VOL of VOL, which reflects how quickly market sentiment is shifting on the value of protection to a downside, according to former Genesis derivatives trader Joshua Lim. When VOL of VOL is higher, there's little market consensus on the fair price of market insurance using options.
"TLDR, not only does no one know what to expect, but they are also less sure of when they expect to know what to expect," Grant said.
Basically, no one knows what to expect. As such, anticipate heightened volatility in the days ahead in my opinion. Not financial advice. Cheers.
This first appeared in Frank Chaparro's biweekly The Scoop Newsletter. Sign up now.
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