August 4, 2023

Desk Commentary - Jump Vol

The operatic rhythms of the media circus saw the attention of crypto markets flit from the weekend's high-stakes drama over CRV exploits and potentially vulnerable levels of collateralization to a fresh ruling in the Terraform Labs case. Eventually, the impetus for a sharp pop higher was found on Fitch's downgrade of the U.S. Government credit rating Tuesday evening, only to once more test 29k as regulatory headlines on Binance brought a momentary gut check on day-trader convictions.

As Fitch joined S&P in asserting that America's standing as a debtor had deteriorated on the back of repeated debt-ceiling purgatory and evident fiscal profligacy, a momentary respite in Tuesday's trade was punctuated by a compelling overture with a 2% gap in bitcoin that ultimately tested 30k.

Back-end vols initially stabilized as did longer-term basis, while gamma continued to trade with an offered tone despite the sudden pickup in realized volatility.

For many crypto stalwarts, what mattered most was the market's rational reflex to buy bitcoin on the back of Fitch's castigating reprisal of the "get your act together" admonition that fellow credit rating agency S&P had articulated over a decade ago. While treasury secretary Janet Yellen lambasted the adjustment as outdated and arbitrary, digital asset markets appeared to disagree, pushing the top cryptocurrency back to the all-important psychological threshold.

Since the downgrade, crypto derivatives flows would seem to suggest that players are upping the ante in their position, with put call ratios plunging below 0.5 and active interest among our franchise to lift front-month quarter delta calls and three-month 25 delta risk reversals, with a pronounced appetite for October upside in bitcoin which has witnessed 1000s of units of 34,000-38,000 strikes print from Tuesday straight through Thursday, even as mid-curve IVs softened.

Curiously, with upside tails prospectively fattening, more sophisticated players had no reservations to dump year-ahead meat and wings in the bitcoin curve, lobbing out chunky clips of 15-35 delta risk that were rationally digested. Meanwhile, year-end vega supply struggled to find takers amidst a flurry of strangle sales that carried over into Thursday flows, where heavy-handed execution put Dec bitcoin downside under the hatchet in blocks of 300x at a time, totaling over 1200 units of cumulative volume.

A chorus of debate continues to grow over the ills (or absence thereof) of the U.S. debt stock. With Bill Ackman announcing size shorts in the long bond just as establishment stalwarts have stood up to decry such skepticism, the narrative of virtually unchecked money supply growth (M2 is less than 5% below its all-time highs of a year ago) and sustained upward revisions to U.S. Treasury borrowing needs, appears to be fodder on which crypto markets are ready to chew with vigor.

Written By

Gordan Grant

Managing Director, Trading and Sales


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