Vol Commentary: Uncertainty

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

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Crypto has traded in a tight range through the weekend, continuing a period where price action has been fairly indecisive. There are two types of low-realized-vol markets; the first is apathy, where nothing is happening and traders don’t expect anything to happen. The second is uncertainty, where traders are expecting movement but are unclear which direction it will be. Given the macro environment outside of crypto, it seems like this period is one of uncertainty, not apathy. There are two significant risks on the board; both are risk overhangs for markets in general, though their effect on crypto (and BTC in particular) are up for debate.

The first risk factor is the ongoing contagion in the regional banking space. We’ve now seen several examples of “regional banks sell off aggressively, BTC rallies”, enough that the correlation between SPs and crypto is now at a local low, and at times we are even seeing negative correlation. The market is now treating this relationship almost as a given, to the extent that we’re seeing BTC longs now rooting for bank failures. It may be that the era of extremely high cross-asset correlation is over, but it would be dangerous to take this as a given, especially in the scenario of wide-spread risk-off. A BTC rally in the wake of controlled banking failures is reasonable, and at the moment we’re seeing BTC correlate with gold more than equities. However, if the failures cascade and we see a general risk-off environment, BTC might struggle; we’ve seen in the past that when given a choice between “risk asset” and “flight-to-quality asset”, BTC still counts as the former.

The other risk overhang is the potential for the US debt ceiling debate to lead to a US default. This should be considered a long-tail event; we’ve seen this standoff many times before, to the extent that it seems almost mundane. However, the long-tail events are the ones that can get you, even if they don’t end up realizing. The most likely scenario is that a compromise will eventually be reached, the debt ceiling will be raised once again, and we’ll get another cycle of commentary about “what does the ceiling even mean if it always gets raised?”… a narrative which certainly fuels BTC. With that said, between now and then we are likely to get further stressful headlines about the Senate debate, and the scenario where a compromise is *not* reached would almost certainly lead to a risk-off environment, and one would expect that price action to extend into BTC. To put it in other terms,this article lays out five scenarios for resolution of the current stalemate. Going through the scenarios and guessing each’s effect on BTC, I would venture “Good, Neutral, Neutral, Good… Bad”. And while the last seems the least likely, it also seems like it would have the largest impact of any scenario.

And finally, back to the initial point. This market has been trading in a tight range, but there seems to be enough risk overhang, and genuine uncertainty about how the market would treat that overhang, that the tight range seems to be more about uncertainty than apathy. Regional bank failures could continue to push the primary use-case of crypto. The Fed could reverse its tightening cycle, leading to new highs in stocks (we’re already only 5% away from 1-year highs in stocks). Or we could see banking contagion, or a US default could cause risk assets to melt. In either case, we’ll see volatility. At the moment, the market is actually pricing itself as if the low realized vol is due to apathy; BTC options are pricing implied vol below 50, and even ETH options are pricing it at just 50 vols, despite the fact that ETH realized vol is typically higher than BTC’s.

In the crypto-specific space, Bitcoin has found another use-case: memecoins. The growth of tokens launched on BRC-20 has led to a massive surge of congestion on the BTC network, with the number of unconfirmed transactions in the mempool nearly 10x higher than at any point in the past. This is leading to higher fees (unlike Ethereum, where high fees lead to higher burn-rate, in this case the higher fees are captured by BTC miners) and caused Binance to halt BTC withdrawals over the weekend. This feels a bit like a sideshow, and not something likely to have long-term effects on Bitcoin’s use-cases, though in the short-term it could lead to market frictions; the largest exchange in crypto (by a wide margin) halting withdrawals of the largest coin (by a large margin) is not going to do any favors for liquidity.