BTC Volatility Review (October 6 - October 27)

Key Metrics (October 6, 4 PM HKT -> October 27, 4 PM HKT)

• BTC/USD -6.4% ($123,450 -> $115,600)
• ETH/USD -7.5% ($4,540 -> $4,200)

• The market has quite clearly indicated a B wave high around $126,000, after which the price has been testing the support level of $109,000 to $104,000 for most of the past two weeks, but has currently rebounded to the resistance level of $114,500 to $117,500. Our view is that this is likely the second sub-wave of a larger five-wave downward movement below $95,000, but considering the impact of the flash crash on October 11, it is difficult to assess precisely, and there is a possibility of entering a more complex adjustment phase that may test the B wave high again (and then correct downward again). The support levels below are at $109,000, followed by $107,000 and $105,000 to $104,500; while on the upside, the initial key resistance level is at $117,500, with stronger resistance in the $121,000 to $125,000 range.

Market Themes

• The past few weeks have been tumultuous for cryptocurrencies and even the global stock market. The confidence in risk assets soared at the beginning of October ("Rally October") but was thwarted when faced with reality, as Trump tweeted a threat before talks with China that if no progress was made on an agreement by November 1, a 155% tariff would be reinstated. This triggered significant de-risking volatility, with cryptocurrencies being victims, as a lack of liquidity during the early hours of October 11 HKT triggered aggressive liquidations, centered around Binance. BTC plummeted to a low of $102,000 (having reached as high as $123,000 earlier that day), while some altcoins experienced even more extreme fluctuations. In the following days/weeks, order book liquidity significantly decreased, leading to sustained high actual volatility until macro risks stabilized, at which point liquidity finally returned to the market.
• Looking ahead, Trump and President Xi are finally scheduled to meet face-to-face in South Korea on October 30, and the main negotiating representatives from both sides have communicated on key issues, suggesting the market seems to be preparing for an agreement. Risk assets opened strongly this week, with BTC also rebounding above $115,000. The Federal Reserve is expected to cut rates again by 25 basis points, as the committee has no reason to deviate from the dot plot expectations from the last meeting based on last Friday's good CPI data. With quantitative tightening policies also expected to end soon (JPMorgan will hold a conference call this week), the combination of these factors along with a trade agreement could lay the groundwork for a rise in risk assets in the coming weeks, especially given the lighter market positions after this month's de-risking volatility.

BTC Implied Volatility

• The implied volatility has fluctuated greatly over the past few weeks, rebounding sharply from a low after the liquidation event on October 11, with actual volatility rising from over 20% to 50%. In the following 10 days, due to the continued thin order book liquidity, actual volatility remained above 40%. However, as the price has been hovering in the broad range of $100,000 to $125,000 since May, demand for options has been relatively muted, so the level of implied volatility has not shown the significant "overshoot" relative to actual volatility that we have seen in similar fluctuations in the past.
• The term structure of implied volatility initially flattened as short-term volatility surged, primarily due to the increase in actual volatility leading to higher demand for Gamma; however, as order book liquidity returned and spot prices climbed back above $110,000 to $112,000, we saw selling pressure re-emerge at the front end of the term curve, although term premiums still exist, with longer-term volatility remaining above pre-event levels, naturally steepening the term curve.

BTC Skew/Kurtosis

• As concerns about breaking below $100,000 have eased, and positive risk sentiment regarding US-China relations over the weekend helped support spot prices back above $115,000, the skew has retreated from deep out-of-the-money put pricing levels. That said, the pricing of skew is very consistent with actual performance; when spot prices are low, both implied and actual volatility are much higher, and as prices gradually recover, both begin to stagnate. Therefore, the skew structure leaning towards put options should remain unchanged, although there may be short-term misalignments around this "fair level."
• Longer-term kurtosis pricing has risen as the market has finally begun to price in "volatility of volatility" (we have just witnessed actual volatility surge sharply from a low of 25-30% to 50%). Additionally, there has been demand for upside wings (call options) in the market, anticipating a significant upward breakout from the current price level, while downside wings (put options) continue to receive support due to the evident pressure shown in previous price drop events.

Wishing you a successful trading week ahead!