CryptoBits: Vol Crush

Written by
Collin Howe, Fenni Kang, Mark Jones, and Joerg Schmidt

Published

December 27, 2021

Flow Analysis

Looking back over the past week, a quiet holiday weekend has belied the fact that the crypto market has rebounded nicely following its slow grind lower two weeks ago. Despite BTC/USD reaching a low at around the $45.5k level, over the past week it surged nearly 10% and has traded in the $50k-52k range since. It’s a similar story for ETH, which has popped from $3,700 up to a $4,000-4,100 range over the same period. It is worth noting though that the ETH/BTC cross has fallen from 0.084 to barely holding a 0.080 level, reflecting BTC’s much more rapid ascent than ETH’s.

Notably, our flow data shows strong buying across all geographic regions - not something we normally see. This trend isn’t hugely surprising though, given the strong price action crypto has enjoyed recently. In line with this, our clients have been better buyers of both BTC and ETH, at 52.8% and 54.7% respectively. We also saw strong buying in ADA and LNK, while there was a clear selling bias for DOT, DOG, and XRP. Breaking down the flow by client type, there’s been very strong buying from almost all client types, with crypto exchanges and family offices getting particularly long, implying that the recent rally included a majority of players in the market, from retail to institutions.

Futures volumes hit new monthly lows as basis saw a light pick-up with spot across the term structure, heading towards the c.11% benchmark implied by the perps during quiet markets. XRP’s anticipated airdrop was the most exciting event of the week, opening up various trading opportunities. The futures-implied XRP borrow rates only increased 3-5 days prior to the event, giving traders a chance to beat the crowd.


The borrow rate continued to rally until it approached an implied c.2.8% (outright, not annualised) on Mar22 contracts on certain exchanges on December 24th, overshooting the expected airdrop yield. This gave savvy traders the chance to profitably unwind their synthetic borrow without needing to participate in the airdrop. Immediately after the event, the airdrop token (SOLO) plunged 50%, which was predictable given the airdrop tokenomics and difficulties shorting it. However, we were surprised to see the XRP spot price sticking stubbornly in the face of expected one-way selling traffic.

In options, implied vols saw a significant downturn, with BTC 6-month vols down a whole 10 points, and 1-month vols down around 9 points over the past week. This vol crush is even more pronounced in ETH, with 6-month and 1-month vols down 15 and 13 vols respectively, with much of the vol move lower occuring on December 24th. The gap between implied vol and realised vol was further reduced across tenors, with 1-month BTC options trading at a mere 3 vol premium and 1-month ETH options at a 4 point premium to realised vol. Unsurprisingly, the recent market rally has reignited appetite for calls, with BTC risk reversals being bid for calls by 6 points for 6-month options, and 3 points for 1-month. While there is a similar trend present in the ETH surface, it’s less visible, with 1-month and 6-month riskies both being bid for calls at around 3 vols. This seems to indicate that despite general risk-off sentiment due to macro factors like Omicron, players are still bullish across a variety of tenors.

Now that price action and volume have settled down significantly following crypto’s rally, looking ahead, the direction the majors take - be it breaking higher or faltering lower - will likely set the tone for the start of the new year. We’ll be watching closely.

Strong buying in the majors, with ADA and LNK seeing the largest buying flows amongst the alt coins.
Heavy buying across all regions, reflecting crypto’s recent rally.
A strong bias towards the buy side from all client types except for banks, which are notably the only net sellers over the past week.

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