Week ending December 5th 2021 | Flash sell-off in crypto: Clues behind the surface

Bitcoin Funding Rate

The flip from neutral to negative funding rate on DEC 4th appears all but a flash in the pan.

And surely, if we were to compare the DEC 4th with funding rates over a 6 month period, it was a mild flash at that. A ‘much ado about nothing’ event relative to the JUN-JUL period.

BTFD Volume Comparisons

I’m not saying we can’t head further South but the dip on DEC 4th had a volume of 10K BTC which is less than a third that of MAY 19th where volume had been 32.5K BTC.

Open Interest

Observe the aggressive drop in open interest during and in the lead up to the JUN-JUL correction.

The same cannot be said for the NOV doldrums and DEC 4th flash fire sale…at least not yet – hodlers are still very much in the game! Participation equals resilience.

Implied Volatility 

Just like CBoE’s VIX, Deribit’s DVOL is its homebrew gauge of the 30 day look-ahead annualised implied volatility.

Unlike May’s volmageddon, November and December barely registers. In fact, without looking at the price chart, and using DVOL alone, trying to guess the price direction would be about as good as a coin toss.

From ‘tomorrow never dies’ to ‘die another day’…

You have to admire the pure, unwavering, gall of crypto traders. 

It’s Monday December 6th at the time of writing this sentence and the most popular instrument by volume, head and shoulders above the rest, are long calls at $120,000 USD strike expiring…wait for it…in 25 days!

Seems everyone wants that New Year’s Eve payday to close out 2021. Having lost their lunch trading the spot market, the YOLO crowd have (once again) shuffled into call options. Crypto has certainly done wonders with accelerating financial literacy. Pretty much everyone in the community knows about puts and calls now…understand, not so much…but know about, very much so!

Never change my crypto brethrens! Never change!

The Smile

Four days out, it’s a fair fight between longs and shorts; the put-to-call ratio for DEC 10th expiration is 0.87. With BTC hovering around $49K USD, there is formidable resistance around $50K and $52K.

25 days out, the IV smile is now exorbitantly crooked to the upside. That skew to the upside persists for longer dated expirations right through to SEPT 30th 2022 expiration where the put-to-call ratio is down to 0.30. FOr the time being, Put buying seems very much a November and December phenomenon.

Deribit Insurance Fund

Deribit presently holds just over 600 BTC in its insurance fund to cover losses incurred by bankrupt accounts in those instances where the accounts are not closed quickly enough to avoid a drawdown from these reserves. Should these reserves become depleted, losses will then be socialized among winning traders.

Lone behold! Deribit did experience a draw of ~12.7 BTC from those DEC 4th liquidations.

354 bankruptcies in total if you sum across a 48 hour window.

December may bring on additional bouts of volatility. If equities are anything to go by, the VIX front month has certainly been stubborn. 

But crypto isn’t equities and although we do see positive correlations during persistent corrections, one would expect DeFi to chart its own course such that, in an ideal world, crypto is uncorrelated to CeFi. We have yet to transition to that type of regime…but the crypto community is nonetheless optimistic that the day is coming.

References

https://www.deribit.com/statistics/BTC/options-data

https://metrics.deribit.com/futures?index=BTC

https://www.coinglass.com/funding/BTC

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