Volatility climbs as Bitcoin dominance continues to recover
Written by Dick Lo, Clement Cheng, and Janson Wang
China intensified its crackdown on crypto with reports that the central bank urged banks and other payment service providers to stop crypto-related activities. The news sent an already-fragile market lower with Bitcoin (BTC) hitting $28,800 and Ethereum (ETH) touching $1,700 on Tuesday before rebounding quickly in the following sessions
News that Paraguay will become the second country to propose making Bitcoin legal tender as well as an agreement between President Biden and the Senate on a $1 trillion infrastructure plan stoked positive sentiment with BTC recovering to a high of $35,500 on Friday
However, both BTC and ETH appears to have failed at key technical resistance levels and the market is bracing itself for yet another weekend of volatility. At the time of writing, BTC appears to be bouncing off support in the low $31k’s but break below this level could send prices right back to Tuesday night’s lows and beyond
Flow wise, we continue to see good interest from clients taking advantage of the elevated implied vols on ETH, selling both downside puts and upside calls 1 to 2 weeks out. There was also outright interest in upside calls on ETH as well as clients looking for downside protection on BTC
Alts continue to under-perform (being a bit of an understatement) with many trading under the lows seen in May although some clients are starting to look taking small positions in “quality” names
In other news, while Chinese miners have been shut down, many have already secured new mining destinations with Texas and Kazakhstan being some of the more popular destinations. Short-term pain for Chinese miners but a reduction in the concentration of hash rate in a single regime should be viewed a long term positive.
Volatility & Skew
Decoupling in the implied vols was seen this week with BTC term structure steepening while ETH flattened
ETH implied vols are back trading above 100% across all maturities with skew well-bid as the market is fearful of further downside risks
Front-month BTC vols seems reasonable given the magnitude of recent moves and we see good strategies for moves in either direction (put ratios, call spreads, risk reversals, etc). Contact the desk for more details
Trading Strategies
With plenty of upside resistance in the $35k-$40k region and in our view, a slightly higher balance of probability that we test the lows, holders of BTC can consider looking at downside protection strategies. We had interest in looking at 16-July $28k/$40k risk reversals with prices unlikely to breach $40k in the short-term
Implied vols at the back end of the curve look rich and we have been looking to sell vol/long skew in Dec21/Mar22 on BTC
Client looking to accumulate BTC and ETH at lower levels can do so via our Bitcoin and Ethereum Linked Contracts. While it is uncertain where the markets may bottom, clients have been picking a range of linked prices — looking to pick up BTC in the $28k-$32k region and accumulate ETH at around $1,700
Contact Us
If you liked the above trading ideas and would like to explore further, please click any of the links below:
Email: trading@tdx-strategies.com
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