2/ Once again, views from our 2021 year-end piece came earlier than expected as equity and crypto markets tumbled on the back of Fed minutes released on Wednesday, 5 January.
3/ From our 2021 piece (docsend.com/view/g7nx3g54t…): "...inflation risk... will compel them (the Fed) and other global central banks to tighten faster, harder and most importantly with resolve."
4/ The minutes confirmed a strong hawiskh bias with markets now pricing in a 90% chance of a Fed hike in March
5/ We are seeing the same tightening bias all over the world
6/ BTC has since traded to a 40,505 low (-14%) and ETH touched the 3,000 level (-22%) before finding some support.
7/ The popular Crypto Fear & Greed Index has been indicating "extreme fear" at these levels.
However, the vol markets have been telling a completely different story.
8/ We did get a spike in front-end vols (BTC +20% to 80% and ETH +30% to 90%) which was what we wanted given our long gamma position (short-dated options).
9/ Unfortunately, this was short-lived as vols have been slammed back down to low pre-minutes levels
(Below: BTC ATM Implied Volatility vs. Spot)
10/ In a similar fashion, this has been observed for ETH ATM Implied Volatility vs. Spot
11/ The vol markets don’t seem to be reflecting “extreme fear”. In fact, over Friday and the weekend, our vol desk saw large call buying interest especially in both BTC and ETH. Our spot flow desk has also been seeing interest to buy the dip in major alts.
12/ We’ve taken profit on a large part of our long gamma position. We are now flat BTC gamma but remain long gamma in ETH and the alts.
13/ For the first time in awhile we’ve actually turned long vega (longer-dated options). We reckon actual “extreme fear” will kick in below 40,000 in BTC or below 3,000 in ETH. We intend to keep deltas very short if these pivot levels break.
14/ Conversely, if the market has based at these levels, we might get that short squeeze we’ve been waiting so patiently for. Both scenarios should see vols tick higher.
15/ In the bigger picture, it seems likely that the all-time-highs in BTC and ETH will remain capped for most of 2022 as a result of central bank tightening.
16/ So if you are bullish in the short-term, buying call spreads looks like a decent trade with risk reversals trading at very low levels (calls cheaper than puts)
17/ That’s all for this week’s market update! We hope to see you in our Telegram community, and hope that everyone has a great week ahead! 👋
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2/ Two of our key views from our 2021 year-end research piece (docsend.com/view/g7nx3g54t…) have come into play a lot quicker than expected:
1. Significant softening of vols 2. Outperformance of 'laggard' layer 1s
3/ The hard dip in vols, especially in ETH, has been truly surprising. 1-month vols in ETH have collapsed to 60+%, a stunning drop from over 95% just two weeks ago!
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Now, on to the thread! 🧵
2/ While spot prices have been trading in a relatively tight range (before the dip today), vols have been telling an interesting story.
3/ Thursday, 23 December, right after we posted our last market update, we saw a mini short-squeeze with BTC crossing above 50,000 and ETH crossing above 4,000.
Vols spiked up 4% on the back of this. A great opportunity to short vols.
1/ If anyone had any doubt that the crypto market is becoming institutional, our option desk traded over $2 billion in options just this week. 🧵
2/The flows have mostly been decent two-way in BTC and ETH but we’ve also seen notable OTC flows in ALGO and LUNA (no surprise as liquidity is streaming out of the two largest Altcoin Defi Option Vaults).
3/ In the past week, panic and nervousness have been leaving the market with vols generally easing (Chart) and BTC risk reversals turning up from -7% to -2% before settling around -5% as we head into FOMC (Chart).
1/ The violent sell-off on Saturday saw BTC trade to 42,333 lows, a hefty 39% drawdown from 69,000 highs. 🧵👇
2/ The result of weekend illiquidity against a risk-off overhang from Omicron fears, inflation concerns, the possibility of an accelerated taper and also weakness in the Chinese stock market.
3/ The China factor stands out for us as funding rates on Chinese-dominated exchanges like Huobi, OKEX and BYBIT continue to be very negative in spite of the bounce in spot off the lows.
1/ Hello from Miami! Point-form summary this week with some insights from our meeting with Paul Tudor Jones. 👇🧵
2/ - Our short vol view on BTC and ETH from last week has worked very well. Both BTC and ETH vols have dropped around 5-10% (week-on-week BTC price remains at 56,000 level).
3/ - We turned long a massive amount of gamma from the month-end expiry on Friday. Gamma realised very well because of the knee jerk reaction to the Omicron headlines as well as Powell’s recognition of high inflation and indication of an accelerated taper.