Key metrics: (29Jul 4pm HK -> 5Aug 4pm HK):
BTC/USD -24.2% ($69,500 -> $52,700) , ETH/USD -30.0% ($3,370 -> $2,360)
BTC/USD Dec (year-end) ATM vol +1.5% (61.1-> 62.0), Dec 25d RR vol unchanged (3.3 -> 3.3)
Significant breakdown of prior trading channel and key support levels marks the end of the previous regime of testing local highs
Major support lies at and below 50k, which held at first test earlier today after a brief dip to 49k
Short term resistance ahead at 54k — a break back above there could see consolidation in the broader 54–64k range as the market attempts to regain its footing into the final quarter of the year
Market Themes:
US recession fears continued to mount as growth data deteriorates; despite this, the Fed appeared in no rush to start their cutting cycle at July’s meeting, leaving the door open for a cut in September but not confirming the market’s aggressive pricing of forthcoming cuts
Continued escalation of rhetoric geopolitically, with Iran vowing to respond to Israel’s latest attack on Hezbollah, combined with the above increased recession fears, saw risk-off sentiment in TradFi markets accelerate significantly
For example, the Nikkei index erased its entire 27% gain on the year in just a few trading sessions, with the 48hour move in implied vol for the index the highest ever (even higher than GFC and March 2020 Covid)
Crypto markets initially didn’t know how to react to the backdrop, with the weaker US data bringing forward the probability of large cuts and therefore pressing the US$ lower against G10 peers and also against precious metals; however the heavy risk-off sentiment prevented any significant rally in beta currencies/crypto and eventually forced liquidations that drove ETH and BTC to cycle lows against the US$
Crypto implied volatility levels also initially lagged the cross-market rise in volatility, partly due to some continued heavy supply last week, and partly due to the initial confusion in the price action. However they duly exploded higher in today’s session as liquidations were seen across the space
ATM implied vols:
For the first 5 days of the week, implied volatility levels drifted lower across the curve, as spot retraced from 70k firmly back to the 63–65k range initially, while continued supply of year-end topside and unwinds of topside calls bought into the Bitcoin 2024 conference were observed
Despite an extremely risk-off session in TradFi markets on Friday, with VIX spiking aggressively, vols in BTCUSD were initially muted as spot held above 60k. However vols began to find a bit over the weekend with spot testing and breaking 60k
As Asia markets capitulated on Monday morning, BTC and ETH liquidations drove spots down a further 10% and drove a brief explosion in implied volatility, with BTCUSD Aug expiry rallying from 56 in the morning (45 low on the week) to 80, before retracing to settle just above 60. Vols further out the curve also had a brief spike, with Dec year end rallying from 58 to 72 briefly, before settling back at 62 — almost unchanged on the week net
Barring an escalation in geopolitics, or a fresh leg lower in equity markets, we anticipate front-end implied volatility levels to retrace a further 5–10 vols, while we should see some support for vols further out the curve, as once again the market proves impossible to hold structurally bullish views in cash
Skew/Convexity:
Pronounced move lower in skew in the front expiry contracts this week, with August skew tracking the spot move lower all week — beginning at just shy of 4 vols bid for topside and ending the week 4 vols bid for downside, reflecting the shift in sentiment for spot and the extremely high realised volatility moves on the downside
Observed correlation of spot vs implied volatility was negative for expiries further out the curve, with implied volatility moving higher towards the end of the week as spot moved much lower… despite this, skew further out the curve remains firmly bid for topside
With Fed expectations shifting in favour of an aggressive cutting cycle, combined with bullish sentiment around Trump, the upside tail for Vega remains firmly in demand, while supply of year-end topside may subside at these lower levels of spot
Sharp rally in convexity towards the end of the week, as realised vol-of-vol picked up aggressively with today’s explosion higher in vol
Liquidations across the complex also likely drove unwinds of overlay selling which put upward pressure on convexity
Overall, strikes outside of the 50–70k range should remain firmly in demand given the shift in paradigm if we do cleanly break out; further more realised spot vs risk-reversal correlation can perform on both sides of the spot distribution from current levels
Good luck for the week ahead!
