May 25, 2023

Desk Commentary - Institutionalized

In a data-laden week starting down a debt ceiling impasse, cryptocurrencies continued to dart in desultory fashion, with bitcoin having once more failed to find traction north of 27,000 and ether falling prey to a nominally insurmountable gamma magnet at 1800.

The nascent decoupling between majors and equities faded similarly as US bill yields topped 6%. Yet there were modest signs of life in the volatility space as tier-1 crypto native players stepped up in a meaningful way to scoop value priced optionality. Even as gamma buckets continued to languish on a high 30-handle and one month 30 delta calls in ETH were offered as low as 44% before a spate of bids saw a modest 3-point spurt in 30th June IVs Tuesday which subsequently retraced all the way back to 44.5% mids by the close of the Wednesday session in New York. The looming specter of a US default is, apparently, an insufficient catalyst for a repricing of volatility risk premia.

Nor are fears of banking instability, which remain sidelined for the moment. Following Bullard and Kashkari's confounding 'one lump or two' commentary, neither were ho-hum Fed minutes nor incremental global inflation prints - which set a 30 year record in the UK – able to serve as much of a catalyst for materially heightened gyrations in cryptocurrency prices. The midweek tape accordingly encompassed one-way lower price action in BTC that witnessed an unrequited retest of the 26,000 threshold. At the same time, ETH found firmer bids near 1780 as the gravitational force of >150,000 units of OI at 1800 for May and June expiries still held some sway.

It's unclear whether the listless, if bearish, tape owes at all to the harrowing tone of recent SEC declarations (to the effect that it will regulate via enforcement rather than legislation) or the Former CFTC chair Dan Berkowitz' baleful comments that ETH may be both a security and a commodity. Either way, such a vacuum is unlikely to muster decisive action on the part of all but a dedicated handful of institutional players, including the aforementioned call buyers who, it seems, believe they know a bargain when they see one.

In some sense, that's fitting, for a concentrated subset of the industry's most well capitalized and committed names has been driving volumes and perhaps also price action for quite some time. A recent Paradigm Institutional Liquidity Network special report highlighted the secular rise in block traded volumes as a proportion of overall Deribit volumes (and as a percentage of gross premiums). While saw toothed, that trend has stayed the course over the last two years, with block trades rising from 20% to 40% of all volumes and block premiums now exceeding 50% of the market in an erratic if steady upward move. Those gains in block market share have occurred as overall bitcoin options volumes (in both coin and $ terms) hit all-time highs in Q1 2023. And as the cumulative profitability of the biggest tickets (>250x BTC) continues to far outstrip low-information-ratio 'small dollar' (<50x BTC) prints, even amongst block-sized trades, according to a recent report by LedgerPrime. Therefore, the thematic arc binding those triple telltales would appear to be one of 'the revolution will be institutionalized' as the largest players grab the lion's share of activity (and alpha) in this burgeoning market.

This is all by way of observing that this week's determined buy-side flow, which took down ~20,000 units of 30th June ETH ~10% OTM calls at cyclical lows in implied volatility, may be notable for more reasons than one.

Written By

Gordan Grant

Managing Director, Trading and Sales


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