BTC Vol — Weeks in Review 6–27Oct

Key metrics: (6Oct 4pm HK -> 27Oct 4pm HK)

• BTC/USD -6.4% ($123,450-> $115,600), ETH/USD -7.5% ($4,540 -> $4,200)

• The market has given us a pretty clear and evident wave B high around $126k, and since then has spent the better part of the last 2 weeks testing the supports from $109–104k, though is now back up testing resistance at $114.5–117.5k level. Our view is that this is likely wave 2 of 5 of a bigger progression down to below $95k but, given the difficulties of factoring in the 11Oct flash-crash, there is a risk we have moved into a more extended correction that might re-test the wave B highs again (before correcting lower). Support down to $109k here and then again at $107k and $105–104.5k, while on the topside initial key resistance at $117.5k before $121–125k heavier resistance

Market Themes

• It’s been an eventful few weeks for crypto (and broader equity markets) as an initial surge in risk assets at the start of October (‘Uptober’) faced a reality check when Trump upped the rhetoric ahead of talks with China, threatening the re-imposition of 155% tariff rates on 1Nov without any progress on a deal. This triggered some significant de-risking in early October with crypto falling victim to an aggressive liquidation event in the illiquid hours of 11Oct morning HK time, with Binance at the epicentre of the event. BTC flashed down to a low of $102k (from as high as $123 earlier that day), while the moves in some Alts were far more extreme. Orderbook liquidity thinned out significantly for the ensuing days/week triggering some elevated realised volatility, before eventually liquidity returned to the market as the risk backdrop broadly stabilised
• Looking ahead, Trump and Xi are finally due to meet in person on 30Oct in Korea, and with a framework for a deal already established by key negotiators on both parts, it seems the market is gearing up for a deal as risk assets have opened the week strongly, with BTC reclaiming $115k in sympathy with the move. The FOMC meeting on Weds 29Oct is also expected to deliver another 25bp cut, with last Friday’s CPI on the softer side, giving the committee no reason to deviate from their dot-plot of the previous meeting. With the end of Quantitative Tightening also expected soon (JPM calling this week), a combination of this and a trade deal could set the stage for a rally in risk assets in the coming weeks, especially with the market’s positioning feeling lighter after de-risking this month

BTC$ ATM implied vols

• Implied vols have exhibited a large range in the past few weeks as we bounced aggressively off the lows on the 11Oct liquidation event, with realised pushing up from the mid-20s to 50 and then sustaining in the mid 40s in the following 10 days as order-book liquidity remained thin. However with spot ultimately respecting the broader $100–125k range that has broadly bound the asset since May, demand for optionality was quite muted and as such implied volatility levels didn’t really ‘overshoot’ versus realised in a manner we have seen previously on such episodes
• The term structure of implied vols initially flattened as front-end expiries led the move higher, with demand for gamma due to the higher realised performance, but as order-book liquidity started to rebuild and spot reclaimed above $110–112k, we’ve seen renewed pressure on the front-end of the curve, while some term premium remains with longer dated vols still higher than before this whole episode i.e. a natural steepening move

BTC$ Skew/Convexity

• Skew prices retraced from their deep pricing for puts as fears of a plunge through $100k abated with the positive risk sentiment over US-China over this weekend helping support spot back above $115k. Having said this, ultimately the skew dynamics have performed incredibly strongly with both implied and realised volatility much high on lower spot, and both implied and realised volatility beginning to stall as we grind back higher. As such risk reversal pricing favour puts should structurally remain in tact, though short term dislocations around that ‘fair level’ are possible
• Convexity prices moved higher in longer dated tenors as the market prices the addition ‘vol-of-vol’ dynamics that the asset has exhibited once more (with a sharp snap from the low vol 25–30 realised to 50 that we just witnessed). Moreover, there has been some interest in wing topside in case of a big eventual break higher from here, while wing downside remains supported given the market’s clear stress on the previous episodes of spot lower

Good luck for the week ahead!

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