Desk Commentary: The Thirteenth Step

Rounding out the third week of the third quarter, crypto majors failed to make anything resembling a decisive move, with sloppy, if not entirely dispassionate, trading marking in the back half. Front-end vols continued to sag, leaving the market awash with significantly higher gamma, all else equal, at the $30,000 and $1,900 points, with no material progress in either direction of the Ripple ruling.

A lurid slide from ~30,400 to 29,600 similarly could not catalyze any substantial demand for shorter-dated optionality, and 1month-1year at the money IV spreads eclipsed 13%. The collective upshot of such dynamics, which has also been reinforced by market chatter, client dialogue, and industry-wide analytical work product, is that it’s more a matter of ‘when’ than ‘if’ a constructive trajectory for cryptocurrency prices will resume. From larger participants in options markets who seem happy to hold on to relatively more expensive longer-term lower-delta instruments to recently announced VC raises by marquee crypto players, pricing and prognostications seem geared to the fourth quarter of 2023 and beyond, with a resurgence in more fundamental narratives driving price action in names like LINK and renewed excitement swirling for once-moribund defi tokens. Bloomberg Insight special reports on crypto have once more highlighted the beneficial ‘S Curve’ dynamic of inflection points in adoption rates and the concurrent capacity for geometric returns in digital assets as a function of Metcalfe’s Law1. Even Larry Fink, in the past weekend’s CNBC interview, concentrated on more secular trends, lamenting the multi-year depreciation of the dollar and waxing eloquent on the capacity of cryptocurrencies to ‘transcend’ such vicissitudes.

Yet with overnight implied volatilities sitting at ~25% in BTC and the July monthly expiry, which also includes the FOMC decision, languishing just over 30%, few seem particularly concerned about the potential for variance on a compressed horizon. Risk asset markets, particularly for tech stocks and other high beta equities, remain supportive as the NASDAQ nears all-time highs and even troubled COVID-era darlings such as CARVANA find fresh, enthusiastic backing.

In that vein, the texture of the options tape for tenors at or inside 1month remains decidedly offered. Top-of-book interest to sell as much as 15,000 units of ETH through mids served as a testament to the degree of apathy on the gamma front. By contrast, determined bids for September and December risk reversals (buying ~34,000-35,000 strike calls vs. selling 27,000-28,000 strike puts) in BTC served as a reasonable gauge of an ascribed distribution over the coming months. Given that the clock is now ticking on both a response from the SEC on the barrage of spot-based ETF filings, which were submitted to the Federal Register this past week, as well as a potential ruling on Grayscale’s petition, such structures offer appropriate gearing for positive outcomes on either front, while selling out of downside protection that, as of now, few seem to feel is warranted.

Note:

“Metcalfe’s Law is a concept used in computer networks and telecommunications to represent the value of a network. The law states that a network’s impact is the square of the number of nodes in the network. For example, if a network has 10 nodes, its inherent value is 100 (10 * 10). The law also suggests that as a network grows, its value grows much faster than its user base.

Robert Metcalfe, the inventor of Ethernet, proposed the formulation of network value in terms of the network size (the number of nodes of the network) in the 1980s. The law was later named Metcalfe’s law.

Metcalfe’s Law is one of the foundational principles of network economics.”

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