*|MC_PREVIEW_TEXT|* | Good morning my tasty friends, I hope you're all having a great weekend.
To kick things off on a positive note this morning, we've got a continuation of the green on the screen theme with bitcoin and friends all trading in the same direction. HIGHER.
For now, it feels better... But F your feelings. What really matters is the data.
Bitcoin has regained its positive momentum across daily, weekly, and monthly timeframes, and is now up 10% on a one-month basis. This is certainly constructive, and a welcome sign as we head into what some are calling Uptober, based on historical, seasonal performance.
Alts (alternative investments to king BTC) from ETH to SOL are also up double digits on the month, but on a trending three-month basis, results are mixed. While we're trading better, ETH down 20% over the past 3 months doesn't exactly scream bullish to me. At least not yet.
Price is up but vol continues to trade lower, which historically speaking also doesn't signal an overly bullish environment. Personally I'd like to see higher implied vols tracking higher prices before I'm more confident in the recent action.
That said, it's crypto, so this can all change pretty quickly.
Expected moves for the week ahead can be found below. | | |
As this is technically an email newsletter, let's get to the big news this week…
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Bitcoin ETF Options Approved
In my mind, the approval of options on bitcoin ETFs was only a matter of time, and boom, the SEC just delivered.
Last Friday, the SEC formally approved Nasdaq's listing of options on BlackRock's bitcoin ETF (symbol: IBIT).
IBIT has over $20 billion in AUM and is the biggest BTC ETF. No surprise it was first in line for options approval, but it won't be the only one. Naturally we'll now start asking about ETH options too. (More on that later.)
The bitcoin options will be American Style, meaning they can be exercised at any time leading up to or on their expiration date, and will settle to the underlying IBIT ETF.
It's unclear when IBIT options will actually start trading, since the OCC and CFTC need to give additional approvals, but these should be on tasty platforms by the end of the year, if not early 2025 at the latest.
| | | As a long time options trader at tastytrade, I couldn't be more excited. It's going to be a fun product to trade and given the underlying volatility in bitcoin, there will likely be some serious trading opportunities.
I can remember selling the 10k strike ETH calls on LedgerX for around $500 when ETH hit new all-time-highs around $4,500 last cycle. I don't think you'll see that in these more liquid ETF markets, but if you're a premium seller or vol trader, you're going to find some trades.
Options on the bitcoin ETFs are likely to draw serious liquidity and more substantial participation from institutions. Whether the increased institutionalization of markets is generally positive or negative for crypto is debatable, it's a clear sign of the maturation of the market here in the United States.
Yes, there are liquid crypto options markets outside the states, just as spot ETFs were available for investors in other countries, but the U.S. is the king of financial markets. It matters, and I'm betting options on spot bitcoin ETFs from the likes of BlackRock are going to have some impact.
| | | A Massive Impact on Bitcoin Markets?
More participation, more liquidity, and a lot more volatility? Maybe. There are two sides to every trade, but it's possible a significant amount of speculative activity, on one side of the options market could have an impact on price action.
I'm talking about a gamma squeeze based on reflexivity in the market.
We've certainly watched this play out at times in meme stocks like GME and AMC. There's also ample analysis supporting the impacts of dealer hedging dynamics on the S&P 500, especially during periods where dealers are likely holding a negative gamma position. Some refer to this as the proverbial, tail wagging the dog.
Here's what I mean… Let's say everyone gets super bullish, for whatever reason. Bitcoin has historically traded in a very reflexive manner. Realized volatility often increases when prices increase. This is contrary to what we typically observe in equity markets where volatility spikes when prices fall.
In Bitcoin, when the price goes up a lot, it ignites a belief that prices are about to go even higher, this creates a feedback loop that perpetuates the trend. This is more commonly known as FOMO.
If this view of much higher prices is expressed through investors, traders, institutions, EVERYONE buying call options, especially at strike prices relatively far out of the money, it's possible it could cause a gamma squeeze.
If you're not super familiar with this concept, here's how it works. Options have something called delta and gamma. These are basically ways to measure how the option's price will change when the price of the underlying changes (in this case the underlying is Bitcoin).
Through this lens, when you have an option position in your portfolio, you can analyze it using delta and gamma values.
Delta shows the size of the position, essentially its directional exposure, relative to the price of the underlying. If you have a big positive delta value, your position will make money when the price of the underlying goes up. It will lose money when the underlying price falls.
As options are dynamic, the size of this position, your risk exposure, also changes when the underlying price moves. Gamma shows us how much our position (delta) will change in size, when the underlying price (bitcoin) changes.
Due to the leverage involved with options, what starts as a relatively small position can grow in considerable size/risk depending on what happens with the underlying price as the option's value is derived from the price of the underlying. This dynamic is measured by gamma.
We took a quick detour, but what to really know is that when you buy a call option, the position has a positive delta and positive gamma value. When the underlying price goes up, the size of the position grows and, in some situations, the higher the underlying price increases, the faster the position grows in size.
On the other hand, when you sell a call option, you have a negative delta and negative gamma position. Call sellers do not want the underlying price to go up. Due to the negative delta and gamma dynamic, call sellers face losses which can grow very quickly (gamma again), when the underlying price (bitcoin) increases.
Now, in a market where everyone is rip-roaring bullish and my family members are texting me for tips, it's possible we see a ton of call buying, especially at strikes far out of the money.
The other side to this trade is the call sellers. If we assume most of the call selling is being done by market makers, then the more call buying there is, the larger the market makers (calls sellers) negative delta and negative gamma position becomes. In this scenario, market markers face a lot of directional risk that needs to be reduced.
Market markers generally are not in the business of betting on the direction of prices, they're concerned with making markets. So, it's likely they will hedge a majority of their resulting negative delta and negative gamma risk.
How do you hedge this risk? Well, the most straight forward way to hedge or reduce a negative delta position is to add delta. As a result, to hedge the negative gamma position, market makers would likely gain positive exposure to the underlying, by either buying spot bitcoin, or more likely, buying bitcoin futures contracts due to the capital efficiency of futures.
Either way, the negative delta exposure is hedged or offset by the positive deltas from buying bitcoin.
In turn, this dynamic and resulting hedging activity has the potential to cause what's referred to as a gamma squeeze. This is where the buying of call options drives increased buying of the underlying asset (bitcoin), pushing the price higher, and in some instances then drivers further call buying, inciting further hedging activity. A super bullish feedback loop.
In the short-term, this can push prices to levels well beyond expectations, though they rarely stay there as this reflexivity wanes. The initial moves can be wild though.
There is an argument that countervailing market forces and participation will naturally offset this as you'll see an increase in covered call writing and put buying once these options are available. This would act as a headwind to a large gamma position in the market.
We can look to crypto options markets outside the US for indication of what to expect when US bitcoin options begin trading, but I don't know if it's a fair representation. These markets aren't easily accessible for most US investors, not in the same way traders will be able to whip out their phone and fire off orders to trade bitcoin options on ETFs like IBIT and others.
We'll see how it plays out, but in my opinion, options trading can now create the conditions for this natural dynamic to be more prevalent in bitcoin, in a similar way that it shows up in traditional markets from time to time.
And remember, bitcoin has a fixed supply.
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What's Next?
It's unknown when exactly bitcoin ETF options will start trading, though fingers crossed, it's this year.
Following this news, the market immediately jumped to ETH options launching too, but the SEC has since announced they've postponed any decision until November as they need more time to evaluate the proposal.
With the SEC's decisions pending and the options market heating up, we're on the cusp of potentially transformative shifts in how cryptocurrencies are traded and perceived by the broader financial community.
For more on the announcement and the potential impact on markets, watch the tastycrypto show this week.
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Base Breaking Records
Coinbase's layer 2 network, Base, is breaking records left and right.
This past week, Base hit new highs across serval key metrics demonstrating significant growth in adoption across key areas such as users, active wallets, and transactions.
If Coinbase is successful in its effort to bring more users into crypto and specifically get these users doing more on chain than simply buying and selling, or transferring crypto, this is good for the industry as whole. Crypto is still early stage, adoption needs to increase, so hats off to Coinbase here.
By the way, the Base network will be available in the next tastycrypto app update. I can't wait.
Base by the numbers:
- Weekly active wallets: 6.7 million
- Weekly transactions: 31.9 million - overtaking Polygon as the most utilized Layer 2 network. For context, Polygon's transactions have sharply decreased to 17.5 million from a previous high of 31 million in March.
- DEX traders on Base: 3.5 million, starkly outpacing its nearest competitors, Ethereum and Optimism, which recorded 115,000 and 96,000 traders respectively.
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PayPal Adds Crypto For Business Accounts
In another sign of growing crypto adoption, PayPal just launched cryptocurrency services for U.S. PayPal business accounts.
Businesses and merchants can now run their own MicroStrategy playbook and hold crypto on their balance sheet with the ability to buy, hold, and sell crypto directly from a PayPal Business Account.
PayPal is also letting these accounts transfer crypto to and from third-party external wallet addresses. A win for self-custody and decentralization.
Another of PayPal's crypto initiatives, its PYSUD stable coin is also witnessing growth in adoption, with its current market cap nearing almost $1 billion, only a year after launching.
You can access PYUSD on chain, through the PayPal feature in the tastycrypto wallet.
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Dollars Keeps Flowing Into Coins
In what's become a common theme in the tastycrypto newsletter recently, capital flows into BTC ETFs continue to support prices.
Early September outflows have reversed, with Bitcoin ETFs achieving a net positive inflow exceeding $700 million for the month, and most recently a one-day inflow of $366 million, the highest daily flow in over two months.
This follows the Fed's 50 basis point super rate cut last week and this week's stimulus bazooka from China, which could set the stage for October, historically one of bitcoin's best performing months, with average returns over 27%.
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Finally, we witnessed some follow through of the bullish post-Fed price action, but the skeptic in me isn't fully convinced we're back just yet.
As of writing, ETH still hasn't been able to break above $2,700 and BTC still needs to prove it can break above recent highs.
Low rates, Chinese stimulus, and more liquidity will push prices higher, but the impacts of these policies will not happen overnight.
The range is still 50-70k. Keep your head on swivel.
Stay tasty,
Ryan | | | | | |
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