Volatility returned with a vengeance as cryptocurrencies contemplated a market bereft of lynchpin FTX’s perpetual centrality.
Yet the tape viciously seesawed in an erratic sine wave as vol surged in early Tuesday, faded abruptly on “Binance bailout” headlines, only to find another explosive impetus higher midday before fading as spot stabilized near 18000 and 1300 for BTC and ETH.
- Such movements in vol were almost tame compared to the panicked bid for optionality with the second swoon in spot toward 17k and 1200 overnight and again during New York trading hours. Weekly expiry BTC and ETH vol saw highs breach those of the summer crisis, cresting 175% and 250% respectively, with a pronounced negative correlation between spot and IV (implied volatility).
- Spreads that had thinned out Tuesday afternoon failed to normalize Wednesday as market-maker liquidity demonstrated a nominal reluctance to return.
- Lower delta (far out of the money) wings remain elevated as vol of implied has spiked, and the crypto vol silo has once again proven the adage that rumors of its death were greatly exaggerated. Market participants willingly sold vol below 50% in BTC and below 70% in ETH just last month, in a stark demonstration of the persistent irrationality of market pricing. The moves of the last 24 hours have shown once again that the stochastic violence of digital asset return distributions deserves respect and is not well adaptable to any assumptions of lognormality.
- With front end IVs well into the triple digits, it’s difficult to contemplate a swift return to the halcyon days of $300 daily ranges in bitcoin and $30 daily ranges in ether that marked the desperate early-q4 doldrums. Yet if anything, the crypto vol market has demonstrated its repeated capacity to frustrate attempts to find an appropriate steady state distributional model which is well calibrated for all circumstances. In brief, we’re prepared to expect the unexpected in the days ahead.
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