BTC Volatility: FOMC Meeting

Key indicators (September 19, 12:00 am -> 12:00 noon, Hong Kong time):

• BTC/USD Spot + 4.5% ($ 59,400 -> $ 62,100)

• BTC/USD ATM Volatility on September 27th -7.0 v (54.5 -> 47.5); December (end of the year) ATM Volatility -1.4 v (59.6-> 58.2), December 25th Risk Reversal Volatility -0.3 v (2.3 -> 2.0)

FOMC Minutes

• The Federal Reserve started a rate cut cycle and announced a 50 basis point rate cut. Chairman Powell is confident about the state of the US economy (If you ask most market participants, they will say the economy is in good shape)

• The immediate reaction was higher US stocks, a lower dollar (relative to fiat currencies and gold) and lower yields. However, much of the gains and losses were priced in by the market after the meeting. BTC/USD and ETH/USD were relatively quiet during the meeting, but rebounded 4% in the early Asian trading hours. Altcoins were generally higher driven by risk-on sentiment

• The overall market reaction was flat, and the cross-market implied volatility was under pressure. The US election became the next important event that the market paid attention to in October. At the same time, the market and the Federal Reserve will pay close attention to the next economic growth data.

BTC/USD Volatility Review

• At the beginning of this week, the market was relatively quiet. However, as the meeting approached, the markets attention to event risk increased significantly, and implied volatility trading also increased. Overnight volatility rose from 65 to 90 last night, which means that the breakeven point of overnight straddle options is 3.5%. In the end, the spot price reached the breakeven point due to this mornings volatility, but the price volatility of the event itself was flat, and by 5 pm New York time, the spot price stabilized near $60,000. Due to the increased market demand for gamma, volatility at slightly longer maturities was also pushed up. Volatility for the September 27 expiration rose from 51.5 to 54.5 at one point, but then quickly fell back to the current 47.5.

• The volume at the far end of the curve is relatively flat, and the implied volatility has gradually declined before and after the event. The market is still looking for a new narrative to break the current range-bound trading. The short-term volatility caused by the spot price breakthrough this morning was quickly digested by the market. The price breakthrough this morning caused IV to rise briefly, but it was quickly given up by the people who had previously shipped out at that time in Long Vega.

• Volatility skew pricing is very stable and despite the rise in spot prices, bullish sentiment has not returned. As expected, implied volatility has struggled to move significantly above or below the spot price (in fact, there has been some top selling pressure as the spot price rises)

Cryptocurrency Volatility Outlook

• In the short term, unless there is a new upward breakout in spot prices, we expect front-end implied volatility to remain under pressure, realized volatility indicators to remain subdued (high-frequency and fixed-term averages around 45), and there is no imminent event risk in the near term. Market participants are likely to take advantage of the upward phase of spot prices to sell short-term top call options as a hedge for their core long spot positions (some such operations have been observed this morning)

• As front-end volatility pressures continue into the weekend, the market may be underpricing options expiring after the US election; we estimate that the total variance of the US election date is currently priced by the market at about 5-6%. This pricing level seems low given its importance to the cryptocurrency cycle (the market priced the FOMC at around 4% (breakeven) last night, and priced the Bitcoin 2024 summit in August at about 5.5%)

• Given that the market is pricing in a 50:50 chance of the election, we expect volatility skew to remain relatively stable ahead of the event, as the market is likely to react symmetrically to the two possible outcomes (i.e., disappointment with a Harris/status quo outcome vs. bullish expectations for Trump) in the early going.

Good luck!

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