Key Takeaways

• USDTerra broke its peg; LUNA collapsed to virtually zero, wiping out billions of dollars in days

• Tether wobbled, dipping to $0.95, before recovering on Thursday

• BTC and ETH down 12% and 17% respectively on the week

•  Most other large cap digital assets down 20-30%

• Market concerns remain around systemic and credit risks

•   Vols rallied hard, and put skew priced in large downside gap risk

Looking Ahead

The Terra ecosystem completely imploded mid-week as USDTerra weakness created hyperinflation in LUNA, whose price dropped from $60 on Monday to as low as $2 on Wednesday and zero on Thursday.  Including LUNA and USDTerra, and assets held inside Anchor, the total destruction of around $50bn worth of assets over the course of only a few days has left many market participants with unanswered questions about where the next blow-up might appear.

Tether had a serious wobble on Thursday, trading down to just above 95 cents before recovering, as apparently redemptions were proceeding smoothly in size. The market remains nervous about which firms have been negatively impacted by the Terra blow-up and to what extent. Only time will tell. In hard numbers, since last Monday, BTC and ETH are down 12% and 17% respectively, and multiple other large cap coins are down 20-30%, with AVAX down 35% (AVAX is a Terra treasury asset).

Our flows this past week have once again shown a preference to buy BTC (52.6% buyers) over ETH (48.6% buyers), while we have seen strong buying in DOG, XRP and ADA, and strong selling in SOL, DOT, LUNA and EOS.   Regionally, our better buyers were again APAC and EMEA accounts, with clients in the Americas more inclined to sell.  By client type, our standout buyers were again banks, while crypto exchanges turned around to become strong sellers.

The OTC lend-borrow business has been slow, as market participants concern themselves with reducing duration and credit risk.  Most alt perps moved to negative basis last week, implying a desire to lock in expensive implied crypto borrow rates to enable short positions to be opened easily.  With all the doom-mongering around crypto markets, it is worth noting that the futures markets are increasingly behaving in a mature manner, with the volatility of the futures basis significantly lower – and cross-exchange funding arbs far tighter – than during previous periods of heightened market volatility.

In options, vols spiked up to their highs on Thursday, with Sept ATM vols, which have been trading in a 61-64 vol range for some time, trading as high as 90 vols.  Risk reversals also blew out, probably hitting a high of around 12 vols for puts in September, and probably 25 vols in contracts inside 1-month tenor.  Since then, vols have settled a little, with the BTC curve running from the low 80s in the front end to low 70s at the back, and ETH from the low 90s to the high 70s.  Unlike ATM vols, risk reversals remain at extremely high levels, indicating the extreme fear of downside gap risk in the market.  

Looking ahead

‍The main economic data point is US retail sales on Tuesday, but in reality the market will focus this week on defence; namely hedging itself against potential systemic risk following on from last week’s events.  Expect prices to remain volatile, spreads wide, and liquidity patchy.

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