TI Weekly Options Market: Be Short

The cryptocurrency asset market ended the last week of May in a relatively peaceful manner. In the past month, the spot prices of Bitcoin and Ethereum both saw a retracement of more than 50%, and many parties suffered heavy losses. It is emphasized here that this adjustment is significantly different from other adjustments in this round of bull market. Until now, the cryptocurrency asset market has not recovered from the decline, and investors will be greeted with more uncertainty in the future.

Looking back at the previous sharp declines in the crypto asset market, it is common for the spot price to go bearish when the bull market ends after the halved market. Many investors compared this decline with last year’s “312”, thinking optimistically that crypto assets will recover from selling pressure and the bull market is expected to be back again. However, after the outbreak of COVID-19, the governments and central banks of the world’s major economies have jointly implemented monetary policy and fiscal stimulus to stabilize the prices of financial assets and ensure the stability of the economic system. Stocks, bonds, and commodities have made outstanding performance under the protection of liquidity. The current macro environment does not seem to be on the side of crypto assets, and the regulatory environment is no longer friendly. Considering that this bull market has been over 9 months, perhaps we are already at a turning point.

Historical Bitcoin price changes, picture source: Goldman Sachs

Summarizing the options market data last week, we find:

  • Bitcoin and Ethereum are unanimously bearish by investors in the short term;
  • The trading volume of options has gradually fallen, and the skewness of options has remained below -10;
  • The forward implied volatility surface of Ethereum remains left-biased, and investors are still optimistic about it;
  • The market pattern of high volatility, negative skewness and low turnover is not good for long positions;

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Bitcoin

In the last week of May, the transactions of Bitcoin options were relatively sluggish. No matter from the terms of the premium or of the contract, there was no way for the trading of options to provide us with more information.

Bitcoin options premium turnover (left) and Bitcoin options contract turnover (right), as of 20:00 on May 31, data source: gvol.io

Observing the implied volatility surface of Bitcoin in the short and medium term, short-term bearishness seems to have become the consensus expectation of options investors. Faced with such a firm market consensus, a market reversal in the short term requires strong stimulus.

Changes in the mid- and short-term implied volatility surface of Bitcoin options as of 18:00 on May 31, data source: gvol.io

Bitcoin’s forward implied volatility surface has a certain divergence, which directly reflects the main contradiction of the crypto asset market at this stage: “Whether the second half of the year is still a bull market?” Facing with the high volatility, negative skewness, and low turnover, the second half of the year is likely to be an opportunity for bears to show their talents.

Bitcoin options forward implied volatility surface, as of 18:00 on May 31, data source: gvol.io

Although there have been no obvious event shocks in the past seven days, the implied volatility term surface still maintains an inverted form, and investors are still cautious about short-term market changes. We can clearly see that the curve is flattening.

The term structure of the implied volatility of Bitcoin options, as of 20:00 on May 31, data source: gvol.io

In terms of high-level data, the implied volatility of Bitcoin on-value options has fallen from a high point, and the market is more sensitive to bearish factors. At the same time, the skewness of options deepens. This combination shows that investors are more worried about the decline, and the market has formed a consensus on price decline. In such a fragile market environment, currency holders do not want to see any trouble.

Bitcoin options implied volatility (left) and skewness (right) changes in the past month, as of 18:00 on May 31, data source: gvol.io

At present, the overall market value of Bitcoin is around $1 trillion. The impact of macroeconomics on the valuation of crypto assets cannot be ignored. Although the correlation between Bitcoin and gold is still not strong, it is an indisputable fact that both are affected by monetary policy. It is expected that the Federal Reserve will conduct monetary policy contraction in Q3. In the second half of the year, crypto assets will face a more severe macro environment.

Bitcoin and gold prices changes, picture source: Goldman Sachs

Through the historical quantile chart to observe the volatility, due to the base effect, the realized volatility under all window phases are above the historical average, and the high-volatility market environment continues.

Realized volatility historical quantile chart, as of 20:00 on May 31, data source: gvol.io

Observing the changes in historical volatility, Bitcoin’s realized volatility and implied volatility both fell. We can clearly see that, compared with the realized volatility, the implied volatility has fallen slowly, and the market is not as tranquil as it seems.

Comparison of realized volatility and implied volatility, as of 20:00 on May 31, data source: gvol.io

Ethereum

Similar to Bitcoin, Ethereum options trading also fell back. The block trade of options is not obvious, and the trading scale within seven days is more balanced.

Observing the implied volatility surface in the short and medium term, due to the negative market environment, investors have formed a bearish consensus on Ethereum. For Ethereum, such negative curved surfaces are not common.

The medium and short-term implied volatility surface of Ethereum options, as of 20:00 on May 31, data source: gvol.io

In terms of the forward implied volatility surface, investors are still optimistic about the forward value of Ethereum. Unlike Bitcoin, investors have no divergence on the value of Ethereum.

Ethereum options forward implied volatility, as of 20:00 on May 31, data source: gvol.io

Observing the implied volatility term surface, similar to Bitcoin, the term surface of Ethereum still shows an upside-down pattern. Investors still haven’t taken the market lightly.

The term structure of the implied volatility of Ethereum options, as of 20:00 on May 31, data source: gvol.io

With reference to Glassnode’s review of “519” adjustment, the price of the stable coin DAI once reached $1.02. At the same time, we can see that the liquidity of DAI has increased significantly during the market decline (an increase of 20%). In the face of a sharp decline in the price of crypto assets, investors will exchange their crypto assets for stablecoins to reduce risk exposure. It is worth noting that in the “312” adjustment last year, the price of DAI once crossed $1.07. With the continuous innovation and optimization of practitioners, we are very pleased to see that the DeFi ecosystem gradually has stronger risk response capabilities.

The dollar price of DAI, picture source: Glassnode

In each sharp decline, spiral selling always exists. In this adjustment, the decentralized lending platform Aave and others have all seen liquidation auctions. The decline in spot prices has caused the rapid depreciation of the collateral held by the lending platform. At this time, stablecoins become the only weapon against currency price adjustments.

The price change of DAI and the scale of circulation, picture source: Glassnode

Observing high-level data, the implied volatility of Ethereum fell back to around 140, which is still a very high level. From the perspective of the skewness index, the skewness value of options rebounded to around -10. It can be clearly seen that the skewness of Ethereum has recovered relatively rapidly.

Changes in the implied volatility (left) and skewness (right) of Ethereum options in the past month, as of 20:00 on May 31, data source: gvol.io

Through the historical quantile chart, the realized volatility of Ethereum in all window phases is within the historical quantile range of 75%.

Realized volatility historical quantile chart, as of 20:00 on May 31, data source: gvol.io

Observing the changes in the volatility of Ethereum, compared with the realized volatility, the decline of the implied volatility is not so significant. Although the price of the currency has fallen more than 45% from the high point, Ethereum does not seem to have formed a very stable base at $2,500.

Comparison of realized volatility and implied volatility, as of 20:00 on May 31, data source: gvol.io

Conclusion

A month ago, investors were extremely optimistic about the market outlook, and it seemed that Ethereum’s breakthrough of $5,000 would not be a problem. Nowadays, most investors have turned long to short, and whether this round of bull market has ended has become the topic of greatest concern to the market. We believe that the decline in currency prices is not the decisive factor in the conversion of bulls and bears. We are more concerned about whether the current adjustment of crypto asset prices will affect the development of the industry:

  • The trading volume and open interest of derivatives fell sharply, and the profitability of exchanges was hindered;
  • The TVL has fallen, and the innovation speed of decentralized applications may be affected;

We are very pleased to see that decentralized applications (lending and trading) are still operating in an orderly manner during this decline, which is enough to prove that technological innovation has made the industry ecology more mature. It cannot be denied that the price decline has begun to affect the profitability of industry builders. If there is no sign of ecological recovery for a long time, the intrinsic value of the token will loosen, and the turning point of the bull-bear conversion may be not far away from us.

Changes in the amount of on-chain total value locked, picture source: Glassnode

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