Vol Commentary: Respect the Chop

Cumberland is commenting on the recent volatility and potential opportunities to take advantage of it.

For further information about Cumberland, please visit Cumberland website here.

Crypto has been in a period of heavy chop for the past few weeks, with quick moves in BTC that are generally unexplained by headlines or macro moves. The past few days have been an excellent example of this, with BTC dropping from just shy of $30k to around $28k despite equities testing their nine-month high. (We saw another example of the same move last week, catalyzed by a false rumor that Mt. Gox coins were on the move.) This type of price action reveals something important to understand about the current climate: the liquidity in this market is not the same as it used to be. Crypto exchange volumes are usually pretty simple: they typically move in lockstep with the market cap of crypto. This trend has been broken this year, with the market cap up significantly but exchange volumes actually dropping. There are two directly related causes for this meaningful change. The first is the increased concentration of volumes at a small number of exchanges. The collapse of FTX didn’t just take one major exchange off the map, it also made risk teams more cognizant of exchange custody risk, which has resulted in smaller exchanges losing market share. The other cause is the regulatory landscape, which has slowed the inflow of institutions into exchange trading that we might otherwise except during a 50% BTC rally. The interesting wrinkle here is that while institutions building capabilities to trade on exchanges may have slowed, institutional adoption of crypto has actually not slackened. Instead, we’re seeing institutions take a more regulated (in every sense of the word) approach; this includes building in the permissioned space, and it also includes sourcing liquidity from OTC. Case in point; we are seeing OTC volumes *increase*, both in spot and options, even as exchange volumes are dropping.

The result of this is a market that is capable of making quick, low-(exchange)-volume moves; the size requirement to move the market is much smaller than it has been in the past. This can lead to some harrowing moments, but it also opens up some pretty clean trade entries. As a case in point: the ETH options market has seen consistent selling over the past week, for the most part appearing to be an unwind of some positioning. In the past, this might have had a fairly light impact. This time, however, we’ve seen implied vols drop to nearly 50%, a multi-year low and a level which seems extremely low according to more than one indicator. First, this actually brings ETH implied vol *below* realized vol, which is quite unusual for almost any asset, much less a speculation-heavy product like ETH. Second, it brings ETH vol down to the same level of BTC vol, despite that ETH has a higher realized volatility over almost any historical period.

In Macro, the market opened up with some relief this week as First Republic Bank was seized by regulators, with JPMorgan saying it would acquire the bank. The FOMC will meet on Wednesday, and the market has a high degree of confidence that we will see a 25 basis point hike; there is also strong consensus in the market that this will be the last hike of the cycle, and the language coming from the Fed will be closely watched to confirm this.