TI Weekly Options Market: End

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

• The spot price fluctuated widely, and the transaction of Ethereum out-of-the-money options was obvious.
• Bitcoin miners dumped crypto assets, and Bitcoin's computing power dropped significantly.
• U.S. Treasury interest rates and Bitcoin spot prices cannot constitute an obvious causal relationship.
• With the market downturn, Bitcoin put options have shown a clear premium.

Bitcoin

The market ushered in a wide range of fluctuations in the third week of June. The spot price of Bitcoin jumped between $40,000 and $30,000. This is the first time that the crypto asset market has experienced a one-week fluctuation of more than 20%+ after the "519". Investors did not react too much to the increase in volatility, and the Bitcoin options market performed stable.

Bitcoin options premium turnover (left) and contract turnover (right), as of 6:00 on June 22, data source: gvol.io

From the Bitcoin options surface, as the Bitcoin spot price drops, the left side of the implied volatility surface is within expectations, but investors are reminded that even when the Bitcoin spot rebounded to $40,000 last week, the premium for Bitcoin put options still exists.

Short-term Bitcoin options implied volatility surface changes, as of 6:00 on June 22, data source: gvol.io

Observing the long-term surface of Bitcoin, long-term investors still have confidence in the value of Bitcoin.

The implied volatility surface changes of forward Bitcoin options, as of 6:00 on June 22, data source: gvol.io

The confidence of long-term investors can be seen from the Long Term Holder. According to the data updated this week by Glassnode, short-term holders and long-term holders are swapping chips:

Short-term holders: The address of the holding period within one year is increasing the scale of selling crypto assets.

Long-term holders: A currency holding address for more than one year firmly holds a Bitcoin spot position.

As we said in the previous weekly report, the high spot price is determined by the enthusiasm of short-term investors, and the bottom of the price is determined by the long-term holders’ judgment on the value of crypto assets. Now that the bearish news is frequent, the market is testing the long-term holders.

The spending of crypto assets by short-term holders and long-term holders, data source: glassnode

However, some long-term investors (miners) have to sell their crypto assets. Weekly Options has been keeping an eye on the economic activities of miners. Because miners have a special role in coin holders, their production, sale or holdings have a non-negligible impact on the market. Currently, it is necessary to seriously consider the role of miners in the crypto asset market.

Since the miner is the only participant who can continuously obtain a price below the market price, the clearing of the miner occurs from time to time in the cycle of changes.

• 2011: Bitcoin began to rise in February 2011, from $0.6 per coin to $23 per coin in mid-2011. The computing power dropped after 3 months. The currency price fell by more than 80%, and the computing power fell by 40%.
• 2013: Bitcoin's spot price started from $20 per coin in May 2013. In January 2014, the spot price of Bitcoin exceeded $1,000 per coin. The computing power peaked in September 2014, and the currency price fell more than 80%, and the computing power dropped by 10%.
• 2018: The spot price of Bitcoin rose from $900 per coin in April 2017 to $18,000 per coin, an increase of more than 20 times. At this time, mining has formed an industry, and the current round of currency prices and mining economic activities have certain reference significance. The price of the currency broke through $18,000 in January 2018. In October 2018, the computing power began to gradually decline, and then the price of the currency fell back to $3,000 per coin, a drop of more than 80%, and the loss of computing power was about 30%.

The reaction of computing power to currency prices in previous cycles, data source: glassnode

In the process of rapid rise in spot prices, the mining industry will have a very exaggerated rate of return in a specific window due to the time required for the deployment of mines and the limited supply capacity of mining machines. At the same time, just because the increase in computing power is slow, the cost of mining for miners is not a horizontal line, but a sloping curve. Falling prices will gradually force higher-cost miners to sell out their crypto assets in order to maintain operations, and low prices will form a certain degree of feedback.

The response of Bitcoin's computing power to the price of Bitcoin in 2018, data source: glassnode

The decline in computing power this time is not caused by the rapid decline in currency prices, so it cannot be compared with the above situations. The data shows that miners are selling bitcoins at a rate of 4k-5k per day in exchange for enough dollars. If the market continues to be sluggish, it is not ruled out that the spot price will continue to fall in the future, which will form a double blow to the miners. Some market participants believe that the impact of event shocks on mine operations will last for at least half a year.

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

The Bitcoin implied volatility curve as a whole rises by about 5%. Due to the large fluctuations in the short-term market, the short-end implied volatility is pulled up by the transaction, so we can see the inverted curve structure, which shows that investors believe that market volatility in the second half of the year will be more intense.

The term structure of the implied volatility of Bitcoin options, as of 6:00 on June 22, data source: gvol.io

Many investors are very concerned about the impact of the Fed’s policy on crypto asset prices. In order to have a deeper understanding of the relationship between interest rates and crypto asset prices, we compared the Bitcoin spot price with the U.S. 10-year Treasury bond interest rate. There is no direct relationship between the high point and the change in liquidity. Taking this round of rise as an example, most of the gains were obtained after the rise in US bond yields.

Bitcoin spot price and U.S. bond interest rate comparison, as of 6:00 on June 22, data source: tokeninsight

In the June FOMC meeting, the Fed raised the overnight reverse repurchase rate (O/N RRP) and interest on excess reserve (IOER), but did not reduce the scale of bond purchases. With regard to the results of the meeting, long and short parties have different opinions.

• The long party believes that the Fed has not reduced the scale of purchases, or even substantively discussed plans to withdraw from QE, so the market does not need to worry about the impact of liquidity.
• The short party feels that the Fed has admitted that the current inflation is persistent, and at the same time raised its PCE expectations for 2021.

Although the views are contradictory, the market is honest. U.S. stocks gold fell and U.S. bond interest rates jumped. This combination confirms the point that our weekly report emphasized that the macro environment in the second half of the year will not belong to crypto assets any longer.

From the perspective of high-level data, the implied volatility of Bitcoin options on value rose by 20%, and the skewness of options was again suppressed. This combination shows that investors believe that market volatility has increased and there are downward expectations.

Bitcoin options implied volatility (left) and skewness (right) changes in the past month, as of 6:00 on June 22, data source: gvol.io

Through the historical quantile chart to observe the volatility, the realized volatility is still maintained above the historical average.

Historical quantile chart of Bitcoin fluctuations, as of 6:00 on June 22, data source: gvol.io

The realized volatility and the implied volatility are maintained in the same level range, the wide-ranging market environment brings a certain premium to the implied volatility, considering that the market faces downward risks, the implied volatility may push the realized volatility rate upward again.

Comparison of historical volatility and implied volatility, as of 6:00 on June 22, data source: gvol.io

Ethereum

In the past seven days, the volatility of the Ethereum market has also exceeded the normal expectations of investors. The volume of options has brought us new information. The volume of options under the contract is higher than the volume of options under the premium. The forward out-of-the-money options are becoming the main trading objects of investors, and traders are preparing for more violent fluctuations.

Ethereum options trading volume, as of 6:00 on June 22, data source: gvol.io

Changes in the short-term implied volatility surface of Ethereum options, as of 6:00 on June 22, 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 22, data source: gvol.io

When spot prices are facing pressure from various dimensions, short-term holders continue to sell crypto assets to the market, and long-term holders still firmly hold the spot. At the same time, the attitude of institutional investors towards crypto assets has become blurred. According to the latest data provided by Coinshares, the Bitcoin crypto asset fund has flowed out for six consecutive weeks, and Ethereum has also shown a net outflow this week.

Changes in the scale of crypto asset funds, data source: Coinshares

In our previous weekly report, we reminded investors to pay attention to the impact of institutions on crypto assets. At the current time, the negative impact of institutions on crypto assets is becoming more and more serious. In this decline, MicroStrategy again purchased $489 million of Bitcoin, with an average purchase price of $37,617 per coin. As of this post, MicroStrategy holds 105,085 Bitcoins, with a cost price of $26,080 per coin. At the same time, Grayscale's trust share will face several centralized unlocks in July, when GBTC's negative premium will become more apparent.

Grayscale GBTC unlock status, data source: bybt

Similar to Bitcoin, the current market volatility has caused a certain increase in the implied volatility of the short-end. Investors are reminded that the London upgrade (EIP-1559) will be carried out next month .

The term structure of the implied volatility of Ethereum options, as of 6:00 on June 22, data source: gvol.io

The wide fluctuation of the spot price has a significant impact on the implied volatility of Ethereum. When Ethereum exceeded $2,000, the options skewness once exceeded -25%.

Changes in the implied volatility (left) and skewness (right) of Ethereum options in the past month, as of 6:00 on June 22, data source: gvol.io

The realized volatility of Ethereum remains above the historical average in multiple windows.

Ethereum volatility quantile chart, as of 6:00 on June 22, data source: gvol.io

Observing the historical changes of volatility, the implied volatility of Ethereum and the realized volatility are still in a relatively stable state.

Comparison of historical volatility and implied volatility, as of 6:00 on June 22, data source: gvol.io

Conclusion

After "312", the financial market experienced a global liquidity easing, and the macro shift will definitely have a negative impact on currency prices. However, the development of blockchain is in a period of rapid development, and the endogenous motivation is sufficient, and the trend of crypto assets cannot be completely determined by macro factors. The most important thing for investors is that the crypto assets in the portfolio should be able to travel through cycles.