CryptoBits: Crypto Vol Trades Signal Rising Risk Premia; Spot Liquidity Thin

Written by
Adam Farthing


May 16, 2023

Key Takeaways

  • Fresh recent low for BTC at $25,880 Friday; squeeze back to $27,600 yesterday
  • ETH a follower again; LTC the outperformer (+12%) on the week
  • Basis remains weak everywhere except CME
  • Gamma buyers pushed BTC vols higher; ~2000x 19 May 28k calls bought
  • Longer dated low delta wings being bought in both directions in BTC and ETH
  • Data thin this week; focus set to remain on risks of US debt ceiling

Looking back

Crypto continued to grind lower last week, BTC reaching a zenith around $25,880 Friday in NY, but recovered to spend the weekend around $1,000 higher, and then notched up a rally to $27,600 in Asia on Monday morning in what can only be described as very thin trading. During the rally, vols moved significantly higher as buyers re-loaded with call side gamma, taking more than 2000 lots of 18 & 19 May $28k calls out of the market. There has been no follow through though; BTC currently hovering around $27k.  ETH has again been a follower.  The standout mid-cap performer of the week was LTC, rallying from $77 to a high around $89, reportedly on the back of the recent introduction of the Litecoin Ordinals Protocol, which allows anyone to mint NTFs on top of the base Litecoin blockchain.

Flows over the past week were better sellers of both BTC (51.6%) and ETH (53.3%); strong buying in DOGE (68.1%), SOL (55.1%), ADA (59.1%) and MATIC (56.3%); strong selling in AVAX (56.3%). APAC clients were strong buyers (63.4%); and by category, exchanges and retail brokers were better buyers.

Preference to sell both BTC and ETH, strong buying of DOGE, SOL, ADA, and MATIC, strong selling of AVAX

Futures basis remains weak on crypto native exchanges: June BTC basis on Binance remains just above 3%, and on Deribit around 0.25-0.75%.  Only on CME have we seen any pick up, with May BTC basis up 3% on the week to around 5%, indicating that perhaps regulated players are accumulating long positions.

Option vols continued to trade with a weak tone until Monday when front end call buyers came in strongly to underpin the curve, buying at least 2000 lots of 19 May $28k calls, and carving out a low point for vols in general, basis June BTC atm vol around 46%, before rallying back to the high 40s.  We saw a large clip of ETH call-side vega sold into the market yesterday, meaning ETH vols may continue to struggle to hold a premium to BTC. Last but not least, we note a recent trend for buying of very low delta long dated wings such as Dec $10k puts in BTC.  Money managers do not buy these sorts of things with the intention to make money from them.  Rather, they are like fire insurance: essentially an exercise in tail risk mitigation, as time moves inexorably towards the US debt ceiling, expected currently on 1 June.  

Looking ahead

Data out this week is thin, the highlight being US retail sales today.  Also watched will be Japan industrial production, as US investors have recently been making noise about Japanese stocks being undervalued.  That apart, there are a raft of central banker speeches throughout the week, culminating with Fed chair Powell on Friday.  Whatever data comes out, however, the market is going to focus more and more on risks associated with the US debt ceiling, and that may just keep a little downward pressure on asset prices in the short term.  

Buy/Sell Ratio by Category

Strong buying from exchanges and retail brokers

Buy/Sell Ratio by Region

APAC client were strong buyers, AMER preference to buy, and a balance in EMEA

All data sourced from our real time systems supporting global 24/7 crypto liquidity provision

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