Good morning, and welcome to First Mover, our daily newsletter putting the latest moves in crypto markets in context. Sign up here to get it in your inbox each weekday morning.
Here’s what’s happening this morning:
- Market Moves: Bitcoin's options market shows renewed bias for downside protection. The cryptocurrency has dived out of an ascending trendline.
- Featured Story: The Federal Reserve may abandon its fight against inflation if and when the corporate credit market shows signs of stress.
- Kapil Rathi, co-founder and CEO, CrossTower
- David Kemmerer, co-founder and CEO, CoinLedger
- Ioannis Giannaros, co-founder and CEO, Wyre
By Omkar Godbole
Nervousness seems to have seeped into the bitcoin market with the cryptocurrency's break of a bullish trendline amid renewed macro fears.
Put-call skews, which measure the difference between implied volatility premiums of calls and put options, are again trending higher, indicating a renewed bias for puts, which are options that offer downside protection.
Notably, the six-month skew has increased from -1% to 5% in one week. The one-week, one- and three-month metrics have seen similar moves, according to data provided by Skew.
"In the current market, the most practical way to hedge with puts is still primarily done in BTC and ETH compared to any other altcoins," CJ Fong, head of Asia sales at crypto liquidity provider GSR, said. "We see BTC skew trending relatively higher than ETH skew with bears taking increasingly polar positions.
"With regards to altcoin (alternative cryptocurrencies) bearishness, we are seeing these expressed in terms of near-strike call selling rather than buying of puts," Fong added.
Noelle Acheson, head of market insights at Genesis Global, said, "We are seeing growing interest in covered strategies. Volatilities have been continuing their trend down, making some expiries notably cheap." (Genesis Global is owned by Digital Currency Group, which is CoinDesk's parent company.)
Implied volatility looks cheap
The one-week implied volatility, which gauges expected price turbulence over the next seven days, fell under 50% annualized over the weekend, which was its lowest level since November 2020. The one-, three- and six-month gauges also continued to decline.
All gauges are now cheaper compared with their lifetime average. Further, the three-month implied volatility is cheaper than the three-month realized volatility. In other words, volatility expectations are underpriced, which, according to options theory, is the best time to take long straddles/strangles, which involve buying both call and put options.
"At this stage, though, buying some BTC puts can be profitable to some extent. Implied volatility remains near all-time lows and hasn't seen a significant uptick in response to recent price declines," Griffin Ardern, volatility trader at crypto asset management firm Blofin, said. "This means that the time value (aka "theta") we need to pay will not be too much. Still, once there is any turbulence, whether from a volatility perspective or price direction perspective, the probability of having some profit significantly increases."
BTC chart leans bearish
Bitcoin dipped to $41,000 soon before press time, having invalidated the bullish trendline from February lows over the weekend. The 14-day relative strength index has entered the bearish territory under 50, supporting a continued price decline.
The immediate support is about $40,000. "On the support side, buying activity has been concentrated around the $40,000 level, where 820,000 BTC was previously acquired, making this the price to watch out for," Lucas Outumuro, head of research at blockchain analytics firm IntoTheBlock, said in a newsletter published Friday.
Will Fed Reverse Tightening Measures?
By Omkar Godbole
The return to risk aversion has revived the discussion about the so-called Fed put, or at what point will the world's most powerful central bank step in to save markets.
One narrative says that sustained positive real yields will force the Fed to throw in the towel, while another says the reversal of tightening will happen next year after the economy falls into recession.
Quill Intelligence CEO Danielle DiMartino Booth says the Fed will spring into action once there are signs of stress in the corporate credit market, according to Arthur Hayes, co-founder and former CEO of crypto spot and derivatives exchange BitMEX.
"I had a phone conversation with her last week, and asked where the Fed put is. She responded that (Fed Chairman) Jay Powell is a credit guy, and is deeply concerned about financial contagion in the corporate bond markets," Hayes wrote in a blog post called "The Q-Trap."
"She reminded me that the Fed effectively nationalized the U.S. corporate credit markets by backstopping BBB-rated companies during the COVID March 2020 crash. Absent this support, the corporate borrowing markets would have a supporting role in the film 'Frozen,' " Hayes said.
While the spread between the BBB-rate U.S. corporate 10-year and two-year bond yields has narrowed, it is still at least 100 basis points short of inversion, a sign of stress. Therefore, the Fed appears to have plenty to room to tighten the policy with rapid-fire rate hikes and a balance sheet run-off.
"As this chart clearly shows, at +1%, the spread has a bit farther to fall before it is inverted. When this curve inverts – and I believe it will, due to softening global demand driven by commodity price inflation from the Russian / Ukraine conflict– how far down the hole will the NDX have fallen," Hayes noted, referring to the chart below.
"Down 30%? … Down 50%? … your guess is as good as mine. But let’s be clear – the Fed isn’t planning to grow its balance sheet again any time soon, meaning equities ain’t going any higher," Hayes added.
Today’s newsletter was edited by Omkar Godbole and produced by Bradley Keoun and Stephen Alpher.
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