BTC Volatility: A Weekly Review July 29, 2024 – August 5, 2024

Key Indicators: (Hong Kong Time July 29 4 PM -> August 5 4 PM):

• BTC/USD -24.2% ($69,500 -> $52,700), ETH/USD -30.0% ($3,370 -> $2,360)

• BTC/USD December (end of year) ATM volatility +1.5% (61.1 -> 62.0), December 25 d RR volatility unchanged (3.3 -> 3.3)

• Previous trading channels and key support levels have been significantly breached, marking the end of the phase that tested local highs

• Major support is below 50k, with BTC briefly dipping to 49k earlier today but maintaining its position

• Short-term resistance is at 54k --- if this level is broken, the market may consolidate in the 54 -- 64k range, attempting to regain footing in the last quarter of this year

Major Market Events:

• As growth data worsens, concerns about a U.S. economic recession continue to escalate; nevertheless, the Federal Reserve does not seem eager to begin a rate-cutting cycle in the July meeting, leaving room for a rate cut in September but not confirming the market's positive expectations for an imminent cut

• Geopolitical rhetoric continues to escalate, coupled with increasing concerns about economic recession, significantly intensifying risk aversion in traditional financial markets

• For example, the Nikkei index erased a 27% gain for the year within a few trading days, and the implied volatility of the index reached a historical high within 48 hours (even surpassing the global financial crisis and the COVID-19 pandemic in March 2020)

• The crypto market initially struggled to respond to this situation, with weak U.S. data leading to rising expectations for significant rate cuts, thereby lowering the exchange rate of the dollar against G10 currencies and precious metals; however, heavy risk aversion prevented a rebound in beta currencies/cryptocurrencies and led to forced liquidations, ultimately causing ETH and BTC to fall to cycle lows against the dollar

• Initially, the implied volatility levels in crypto also lagged behind the rise in cross-market volatility, partly due to the continued increase in supply last week and partly due to the chaotic price movements at the beginning. However, with today's market liquidation, crypto implied volatility surged as expected

ATM Implied Volatility:

• In the first five days of this week, implied volatility levels declined across the curve, with spot prices steadily retreating from 70k to the 63 -- 65k range, while continued supply of year-end options and the unwinding of bullish options for the 2024 BTC summit were observed

• Despite extreme risk aversion in traditional financial markets on Friday, with VIX soaring, the initial volatility of BTCUSD remained muted, with spot prices staying above 60k. However, as spot prices attempted to break below 60k over the weekend, volatility began to rise

• During Monday's early Asian market crash, forced liquidations of BTC and ETH led to a further 10% drop in spot prices and triggered a brief explosion in implied volatility, with BTCUSD August contracts soaring from 56 (week's low of 45) to 80, then retreating to just above 60. Volatility on the forward curve also saw a brief uptick, with December's year-end contracts rising from 58 to 72, then falling back to 62 --- with almost no change in net value this week

• Unless geopolitical tensions escalate or the stock market experiences another significant decline, we expect front-end implied volatility levels to retreat by 5 -- 10 points, while forward volatility will receive some support as the market proves it is nearly impossible to hold a structurally bullish view in the cash market

Skew/Convexity:

• This week, the skew of front-end expiry contracts flattened, with August skew following the decline in spot prices --- starting slightly below 4 volatilities at the beginning of the week and ending with a downward shift of 4 volatilities by the weekend, reflecting the shift in sentiment in the spot market and significant changes in actual volatility during the downturn

• A negative correlation between spot prices and implied volatility was observed in forward expiry contracts, with implied volatility climbing upwards as spot prices fell sharply over the weekend… Nevertheless, the skew on the forward curve remains robustly upward

• Due to the Fed's expectations shifting towards an aggressive rate-cutting cycle, coupled with bullish sentiment surrounding the Trump situation, demand for Vega on the upside remains strong, while supply for year-end upside may decrease at these lower spot levels

• Today's volatility explosion led to a significant increase in actual volatility, resulting in an uptick in convexity over the weekend

• The forced liquidations across the market may have also driven the unwinding of covered short positions, thereby exerting upward pressure on convexity

• Overall, considering the shift in market paradigms, if we can break through the price range of 50 -- 70k decisively, demand for options strike prices beyond that range will remain strong; additionally, at current levels, the correlation between actual spot prices and risk reversals can manifest on both sides of the spot distribution.

Good luck!