Key indicators (September 19, 12:00 am -> 12:00 noon, Hong Kong time):
BTC/USD Spot + 4.5% ($ 59, 400 -> $ 62, 100)
BTC/USD September 27 ATM Volatility -7.0 v (54.5 -> 47.5); December (year-end) ATM Volatility -1.4 v (59.6-> 58.2), December 25d Risk Reversal Volatility -0.3 v (2.3 -> 2.0)
FOMC Minutes
The Federal Reserve started a rate cut cycle and announced a 50 basis point rate cut. Chairman Powell is confident about the state of the US economy ("If you ask most market participants, they will say the economy is in good shape")
The immediate reaction was higher US stocks, a lower dollar (relative to fiat currencies and gold) and lower yields. However, much of the gains and losses were priced in by the market after the meeting. BTC/USD and ETH/USD were relatively quiet during the meeting, but rebounded 4% in the early Asian trading hours. Altcoins were generally higher driven by risk-on sentiment
The overall market reaction was flat, and the cross-market implied volatility was under pressure. The US election became the next important event that the market paid attention to in October. At the same time, the market and the Federal Reserve will pay close attention to the next economic growth data.
BTC/USD Volatility Review
At the beginning of the week, the market was relatively quiet. However, as the meeting approached, the market's attention to event risk increased significantly, and implied volatility trading increased accordingly. Overnight volatility rose from 65 to 90 last night, which means that the breakeven point of overnight straddle options is 3.5%. Ultimately, the spot price reached the breakeven point due to this morning's volatility, but the price movement of the event itself was flat, and by 5 pm New York time, the spot price was stable near $60,000. Volatility at a slightly longer term was also pushed up due to the market's increased demand for gamma. Volatility for the September 27 expiration rose from 51.5 to 54.5 at one point, but then quickly fell back to the current 47.5.
The volume at the far end of the curve is relatively flat, and the implied volatility has gradually declined before and after the event. The market is still looking for a new narrative to break the current range-bound trading. The short-term volatility caused by the spot price breakthrough this morning was quickly digested by the market. The price breakthrough this morning caused IV to rise briefly, but it was quickly given up by the previous Long Vega people who shipped at this point.
Volatility skew pricing is very flat and despite some gains in spot prices, bullish sentiment in the market has yet to return. Unsurprisingly, implied volatility struggled to move significantly both above and below spot prices (in fact, spot prices encountered some selling pressure at the top as they rose)
Cryptocurrency Volatility Outlook
In the short term, unless there is a new upward breakout in spot prices, we expect front-end implied volatility to remain under pressure, realized volatility indicators remain subdued (high frequency and fixed-term averages around 45), and there is no imminent event risk in the near term. Market participants are likely to take advantage of the upward phase of spot prices to sell short-term top call options as a hedge for their core long spot positions (some such operations have been observed this morning)
As front-end volatility pressures continue into the weekend, the market may be underpricing options expiring after the US election; we estimate that the market is currently pricing in a total variance of ~5-6% for the US election date. This seems low given its importance to the crypto cycle (the market priced in FOMC at around 4% (breakeven) last night, and priced in the August Bitcoin 2024 Summit at ~5.5%).
Given that the market is pricing in a 50:50 chance of the election, we expect volatility skew to remain relatively stable ahead of the event, as the market is likely to react symmetrically to the two possible outcomes (i.e., disappointment with a Harris/‘status quo’ outcome vs. bullish expectations for Trump) in the early going.
Good luck!
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