TI Weekly Options Market: Embrace Volatility

TI Research

In the last week of June, the cryptocurrency asset market witnessed a thrilling "defensive counterattack". Bitcoin and Ethereum experienced first decline and then rise. The mainstream currency is undoubtedly the protagonist of this volatility, and behind this decline-repair, We found that although the market is still weak, the bulls are not vulnerable. At the same time, many major indicators have undergone important changes in this round of adjustment.

Summarizing the options market data last week, we find that:

  • The spot price fluctuated widely, and the activity of options trading increased.
  • Under the negative trading background, mainstream currencies drove the market back to strong strength.
  • According to the data released by glassnode, the pressure of Bitcoin miners to sell crypto assets was weakened.
  • The expansion of US dollar stablecoins (USDT, USDC, etc.) has slowed down.
  • Ethereum's skewness rebounded, and bearish expectations were weakened by the rebound.

Bitcoin

As it entered the last week of June, the crypto asset market became more volatile. On June 22, the spot price of Bitcoin successfully fell below $30,000 and once fell to $28,000. On June 25, as it came to the half-year delivery of crypto asset options, the spot price of Bitcoin ushered in a big rebound after the delivery. The increase in spot price fluctuations stimulated the activity of options trading. The scale of options trading in the past week was relatively satisfactory, with many large transactions.

Bitcoin options premium turnover (left) and Bitcoin options contract turnover (right), as of 6:00 on June 29, data source: gvol.io

In the Bitcoin options surface, the decline in the price of Bitcoin made options investors continue to buy put options. Even when Bitcoin dropped to $28,000, investors were still betting that the spot price would adjust to a lower price edge. At the same time, even if there was a certain recovery in the weekend market, the short-term implied volatility surface still maintained a left-biased pattern.

The implied volatility surface changes of short-term Bitcoin options, as of 6:00 on June 29, data source: gvol.io

Observing the implied long-term volatility surface, long-term investors were optimistic about the forward value of Bitcoin. It is worth mentioning that, because the half-year delivery in 2021 has been completed, Deribit immediately launched options contracts that expire on June 24, 2022. From the implied volatility surface, we can find that investors are still willing to pay a premium for forward call options, and market uncertainty has not affected the long-term value of Bitcoin.

Changes in the implied volatility surface of forward Bitcoin options, as of 6:00 on June 29, data source: gvol.io

Due to the well-known reasons, many investors are very concerned about the latest trends of miners. According to the data released by Glassnode, the bitcoin spot held by miners was about 1.8 million, which accounts for about 9% of the total number of bitcoins. In the past two weeks, its balance sheet has decreased by about 1,000 bitcoins. Considering that the miners can produce around 600-1,000 coins per day, the rate of their selling bitcoins is around 1,000. However, according to the latest data, the situation of miners' selling seems to have improved, and there are signs of stabilization on the asset side.

Changes in spot holdings of miner addresses, data source: glassnode

The implied volatility term curve shows that the short-term market fluctuations raise the short-term volatility of Bitcoin, and the term curve appears inverted overall. However, the curve as a whole is flattened, and the volatility skewness between the forward and recent volatility does not exceed 15%. This pattern has no chance for arbitrage traders.

The term structure of the implied volatility of Bitcoin options, as of 6:00 on June 29, data source: gvol.io

The market has recently been concerned about the safety of Tether. We extract the USD price of Tether to analyze its performance. By observing the chart, we can find that the price of Tether in this cycle is relatively stable when facing market shocks. Considering that during the 2018 bear market decline, Tether did not experience exchange issues, so investors do not seem to have to worry too much about its safety.

Comparison of Bitcoin spot price and USDT issuance volume, as of 6:00 on June 29, data source: Messari.io

However, it is worth noting for investors that since June, the issuance speed of US dollar stablecoins has dropped significantly, which is a very unfavorable signal for currency prices. There are few research and analysis reports on the US dollar stablecoins in the market. In fact, the US dollar stablecoins (USDT, USDC, BUSD) are the core component of the liquidity of crypto assets, not the US dollar. From the perspective of liquidity, in the past year, stablecoin issuers have released a large number of US dollar stablecoins (USDT, USDC, BUSD) to the market. Under rational assumptions, investors buy stablecoins not for holding, but for trading (stablecoins do not have the ability to add value). The stablecoins with increasing circulation will be transformed into buying power for crypto assets, thus forming a strong support of the currency price. However, the current expansion of the US dollar stablecoins have shown signs of slowing down, which has never been the case in the past year.Comparison of Bitcoin spot price and USDT issuance volume, as of 6:00 on June 29, data source: Messari.io

Comparison of Bitcoin spot price and USDT issuance volume, as of 6:00 on June 29, data source: Messari.io

In terms of high-level data, as the spot price of Bitcoin fluctuates, the implied volatility of on-value options has risen to a certain extent, but then it has dropped significantly. However, in the process of falling, options skewness becomes more unstable. Put options will amplify their premiums from time to time, but this volatility has gradually converged, and put options are still strong in the short term.

Changes in Bitcoin options implied volatility (left) and skewness (right) in the past month, as of 6:00 on June 29, data source: gvol.io

Through the historical quantile chart, the realized volatility of Bitcoin has adjusted again, and the realized volatility under all windows is in the 75% quantile range.

Historical quantile chart of Bitcoin fluctuations, as of 6:00 on June 29, data source: gvol.io

The implied volatility and the realized volatility are still in the same range. Although the implied volatility has a certain discount relative to the realized volatility, after "519", the two have not gone out of obvious independent market .

Comparison of historical volatility and implied volatility, as of 6:00 on June 29, data source: gvol.io

Ethereum

In the past seven days, Ethereum's market volatility has also exceeded investors' normal expectations. Ethereum options trading volume was very hot, which might lead to higher trading premiums.

Ethereum options trading volume, as of 6:00 on June 29, data source: gvol.io

For the short- and medium-term implied volatility surface, the shape of the Ethereum surface appears to be contradictory. In a week of violent price fluctuations, Ethereum, like Bitcoin, is looking for a price center again.

Changes in the short-term implied volatility surface of Ethereum options, as of 6:00 on June 29, data source: gvol.io

The forward implied volatility surface still maintains a positive shape, and investors still have solid confidence in the long-term price of Ethereum.

Changes in the implied volatility surface of Ethereum options forward, as of 6:00 on June 29, data source: gvol.io

We found very interesting information in the changes in our on-chain economic activity. According to the data of the Ethereum explorer, the development of the on-chain ecosystem is moving forward in an orderly manner, and the new users of Ethereum still maintain a good growth trend.

New users on the Ethereum chain, data source: glassnode

We mentioned in the previous weekly reports that we were very worried that the decrease in currency prices would affect the on-chain economic activities. In the last week of June, the number of daily transactions on the Ethereum chain stopped its downward trend around 1,250 K, and even showed obvious signs of recovery.

The number of transactions on the Ethereum chain, data source: etherscan.io

According to the view published in the glassnode weekly report, although the staking amount (USD denominated) of various DeFi projects has dropped significantly, the decline in the staking amount has not exceeded the decline in the currency price, which shows that the number of staked tokens has increased to a certain extent .

The sluggish currency price makes the transaction deserted, but the amount of the on-chain staking and the trading volume are both showing signs of improvement. If this performance can continue, it will be a big bull for the market.

Ethereum's on-chain staking, data source: glassnode

Observing the data of Parsec Finance, the clearing threshold of on-chain lending projects (Maker, Compound, etc.) has been moved from $1,800 to $1,500 and $1,000. The lowering of the clearing threshold will open up space for Ethereum's volatility.

The clearing position of Ethereum on the chain, data source: Parsec Finance

The term structure of the implied volatility of Ethereum is flattening, similar to Bitcoin.

The term structure of the implied volatility of Ethereum options, as of 6:00 on June 29, data source: gvol.io

Observed from high-level indicators, the implied volatility of Ethereum on-value options quickly fell after rising, but the skewness maintained an absolute numerical range, which means that despite the recovery after the fall in the price of Ethereum, the investors' buying power of put options has not diminished at all. Therefore, we can believe that bearish expectations have been weakened by the rebound, and the risk of market downward is temporarily eliminated.

Changes in the implied volatility (left) and skewness (right) of Ethereum options in the past month, as of 6:00 on June 29, data source: gvol.io

After the market adjustment, the realized volatility within the period has risen to more than 75%.

Ethereum volatility quantile chart, as of 6:00 on June 29, data source: gvol.io

Observing the historical changes of volatility, although the spot market has changed a lot last week, the implied volatility and the realized volatility are still in the same range. In addition, the implied volatility has a certain discount relative to the realized volatility.

Comparison of historical volatility and implied volatility, as of 6:00 on June 29, data source: gvol.io

Conclusion

In the last week of the first half of 2021, the crypto asset market experienced considerable volatility. Under the pressure of shorts, the bulls showed unexpected resilience. Behind the market decline, Bitcoin miners stopped selling Bitcoin, and Ethereum’s on-chain economic activity has been significantly recovered. The strong rebound has weakened investors’ short expectations to a certain extent. The competition between the long and the short is not accomplished overnight.

Bitcoin

Ethereum

Options

TI Research

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