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November 26, 2020

Crypto RFQ

Bitcoin Volatility and Variance Swaps With Flowdesk


Teana Baker-Taylor
General Manager UK,

Guilhem Chaumont, CEO of Flowdesk, joined Teana Baker-Taylor to dig into the cryptocurrency derivatives market and provide a bit of market analysis. Bitcoin options open interest has been on the rise, increasing at a higher rate than BTC futures and the bitcoin market cap.

Chaumont said what’s happening in the options market right now is definitely interesting, in addition to what’s going on in the regular BTC spot market. He said that over the past few months, there has been a 3X increase in the open interest on bitcoin options. In the same period, however, there has only been an increase of 60% for bitcoin futures open interest.

Chaumont explained the reasons for this, the first of which being that the futures market is maturing to some extent. He pointed to exchanges, saying that they’ve launched a new range of products, whether it’s futures, long-term maturity futures, margin futures, etc. And they’ve also launched a higher range of asset classes, such as FTX with perpetuals on the top 20-50 coins.

(1:36) “I think that right now in terms of products, this market has matured. So that’s why we are not seeing such high growth from new product releases. And at the same time, we have bitcoin options, which are getting more and more interest,” Chaumont said.

He added that the USD 1 billion threshold for open interest is very recent, so he believes that there has been some catch-up in terms of growth rates for the options and also investors trying new ways to get into bitcoin to share in the upside without necessarily having the risk of liquidations like there has been in the futures market.

Teana pointed out that implied volatility that the market is experiencing during this bull run is pretty low, asking if it’s also a sign of a maturing market.

Chaumont agreed, saying it is in fact another sign and a very interesting one at that. He said that everyone has been surprised by the bull run in which there has been almost a 100% increase with very tiny pullbacks, pointing to a recent 4-5% retracement and saying it is “very unusual.” He believes there are several reasons for this, a couple of which he will address.

The first is that the market is less retail driven now vs. the previous bull run, with institutions getting into the market and using the spot markets to do so. That’s one explanation. The other is that historically speaking, particularly during the March 2020 market crash, derivatives had a huge impact on the spot markets, with strong liquidations and retail participants investing with up to 100x leverage. He believes that the market is being a lot more rationalized with more regulation.

Chaumont  pointed to BitMEX, saying that its share went from 25% a few months ago to only 10% today. So that explains why there are fewer liquidations and therefore less volatility.

Overall, he believes it’s an overall trend that has been in place in recent years. If you look back to 2017, for example, the one-month in the money implied volatility went as high as 150%. And it has only been going down since, he explained. Today the highest value that the market has seen has been slightly over 70%, which is extremely low. Chaumont  believes it could go a bit higher, especially if the markets retrace. But it’s still a very positive sign that the markets are being more rationalized.

Chaumont also said for all of the reasons discussed, new products are being created, volatility products. On that note, he announced a new variance swap that is being launched on Xena Exchange, which he described as a “typical variance swap that allows you to bet on volatility by exchanging the realized volatility against the implied one.” It is a typical monthly contract and Flowdesk is providing the liquidity for the contract with a very interesting spread that is comparable to what you would find on other exchanges,” he added. Xena has reduced counterparty risk, if not neutralized, thanks to the off-exchange settlement through ClearLoop.

(5:58) Chaumont said “it’s only the beginning of this new wave of products,” pointing to the VIX  to pave the way for the structured products that are needed for higher adoption, particularly from professionals and institutions.

With the bitcoin price nearing its all-time high, Chaumont said it’s difficult to make an honest guess on whether it will reach USD 20,000 by year-end. He is willing to say, however, that the implied probability of BTC hitting USD 20K by year-end is slightly above 30%, adding, “I think that there is a good chance that we get there eventually…And looking at the current market, which is very fast, very directional, I think it could happen definitely sooner than later.”

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Gerelyn Terzo
Gerelyn caught wind of bitcoin in mid-2017 and after learning about the peer-to-peer nature of Satoshi's creation has never looked back. Previously she covered institutional investing and fintech for several major trade publications. Gerelyn resides in Verona, N.J.

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