May 24, 2021

I Am Not Buying Until Elon Is Crying

What I see in the market right now is deleveraging and and taking the risk off pretty much across the board. However at these levels the new market entrants ( and new whales like Microstrategy and Musk ) who bought in the mid-30s are getting nervous and uncomfortable, but still have not capitulated. But if markets head lower from here, we will see a real capitulations and BTC will likely head to below 20. That will be a good dip to buy! 

So, to summarize, this is not a fundamental analysis, this is not technical analysis, this is my speculation on peoples emotions - right now is not the dip to buy, it is too early. Wait until the whales start puking and buy at 20 !

May 17, 2021

BTC Funding Rate Turns Sharply Negative

As of this morning following the market selloff BTC-perpetual funding rate, aka basis, turned sharpy negative after trading in green for the last 1/2 year. From the chart below it looks like breaking 44K level triggered the decline, and this can signify a major shift in investor sentiment. This can also possibly be an end to both general crypto bull market, and also dampen DeFi projects since their performance correlates to volatility and funding rates. 

Apr 11, 2021

Cryptocurrency Volatility Indexes

 Last week I wrote about BVOL - bitcoin volatility index launch on Deribit. However this is not the first crypto volatility index. In fact last year T3 Indexes - the folks behind SPIKES volatility index launched both Bitcoin and Etherium volatility indexes, and already executed trades tied to their BitVol index on LedgerX platform. 

The first trade executed about a month ago was a call spread; the second one traded last week for a pension plan, and established a long Bitvol position via a short put spread and calls. 

As typical with new financial instruments, futures on BitVol will likely to be listed first. What their pricing may look like? We can take a clue from existing volatility indexes - where pricing is based more on the statistical properties of the process rather than no-arbitrage principles. So, let's take a look :

The chart above is the full available history of the index; median is 79 and mean is 85 - just a tad higher than the current value of 82. We see large spikes when Bitcoin rose and fell - implying both put and call skews.
 Similar to the VIX, the distribution of values is right-skewed, and log transformation makes the distribution almost normal. With the volatility of volatility of  ~ 120 it is not that much higher than that of the VIX. Trying to model the index as a simple Ornstein-Uhlenbeck (mean-reversion) process in log was kind of mess - the data is very noisy.

Eventually I was able to estimate reasonable parameters, and came up with the following short-term curve ( assuming current value of 82 ) for the next 28 days. Practically I assume that there will be monthly expirations to coincide with the monthly options expiration cycle.


In the following posts I will continue writing more about these exciting products. In the meantime, if you are an active options trader and are interested in trading Bitcoin or Ether derivatives take a look at Deribit which is the leading crypto derivatives exchange with 90% of market share. And if you have any questions about the post, feel free to reach out to my email address on the sidebar.

Mar 31, 2021

DVOL – Deribit Implied Volatility Index

DVOL volatility index

 If you woke up this morning and realized that Deribit page looks somewhat different, you're correct: today the largest crypto-derivatives exchange premiered its own real-time volatility index. The methodology is variance swap with standard liquidity adjustments. Since Deribit trades north of 90% of cryptocurrency options this is a significant and important market benchmark.

Exchange's plans are ambitions:  they are planning on launching futures on volatility index "very soon." In upcoming posts I hope to cover some mathematics behind volatility index, and how futures on DVOL can be priced. 

Read more details here. As I mentioned in previous posts - if you want to trade Bitcoin and Ether options there is no better, more liquid and more robust place than Deribit. With recent market run-up there are ample opportunities to capitalize on skew in cryptocurrency options.