← Markets Outlook
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- [00:00]
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- [00:50]
Greg
Cyclical basis you get to get this sort of Wall street bets crowd that could, you know, essentially run up the asset from a low price option call buying. I think structurally we're on the same page. Essentially the volatility has to go down as the asset class grows and matures. It just takes more money to move around bitcoin at a $2 trillion market cap than it does at a $300 billion market cap.
- [01:23]
Jen
Greg, welcome to the show.
- [01:25]
Greg
Thank you so much, Jen. Happy to be here.
- [01:27]
Jen
Happy to have you here. Now Andy and I were discussing previously that bitcoin has really been in this kind of range bound situation. Talk to me about what you're watching when it comes to bitcoin this week.
- [01:42]
Greg
Yeah, I find the volatility of bitcoin quite interesting year to date. So if we look at the DVAL index, this is really the deribit BIX methodology applied to Bitcoin options. We can see that the DVAL index year to date has come down from 60, all the way down to 40, just a consistent grind lower. And this is really in line with a lot of the institutional participation that we're seeing in the IBID options and the inflows into the etf. As we get more sort of institutional traders and investors, we're seeing some of the typical flows that you would see in traditional equities. Buying the underlying asset, selling the covered call, maybe buying the put all those types of flows reduce risk in the underlying asset. And I think this is kind of what's playing out here.
- [02:26]
Andy
You know, it's good to hear that. I think that one of the predictions we on the index side made for 2025 was that volatility would decrease with adoption growing. I think there were some voices out there that predicted that the availability of bitcoin ETF options would give people, especially retail traders, this ability to sort of yolo themselves into upside calls. And that could, you know, with an, with an accompanying price rise could cause these kind of short gamma positions which would increase volatility. I mean that would be episodic and even in the best of circumstances. But we didn't really see any of that so far this year, have we?
- [03:05]
Greg
No, we haven't, and that's a great point. On a cyclical basis you could get this sort of Wall street bets crowd that could, you know, essentially run up the asset for, from a low priced option call buying. I think structurally we're on the same page. Essentially the volatility has to go down as the asset class grows and matures. It just takes more money to move around bitcoin at a $2 trillion market cap than it does at a $300 billion market cap. So that's kind of the underlying pressures that I usually come back down to. But as you pointed out, there is always this opportunity for cyclical volatility. And another narrative that's been floating out there, which I think is a valid narrative we've got to keep in the back of our minds, is if we really get sort of the sovereign investment or the central bank buying from a big country, that changes the game instantly and we could see things go crazy. And there's this narrative of a sell side liquidity crisis. Where is there enough Bitcoin to fill up the, the ask side of the order book? And how high do prices go in that type of scenario? I think that's pretty interesting. It's always a scenario to keep in the back of our minds, but so far we haven't seen that.
- [04:17]
Andy
At the, at the end of the last big deribit expiration, I remember exiting that expiration with a conspicuous absence of upside open interest. Now the expiration that just happened last week was a record notional amount. What was it? 45 or between 40 and 45 billion of options came off. Right. So given the fact that Bitcoin's range traded in this very tight 10% range except for one day, you know, for the last 50 or so days, how did that open interest accumulate and how would you characterize it?
- [04:59]
Greg
Yeah, I think it's really important to. I, I think the open interest that we see growing in futures and options is very bullish in sense, that there's a lot of participation. But we also got to keep in the back of our minds that notional open interest grows with the asset price increasing in value as well, so I think that's a little bit part of the equation, but what I'm seeing right now.
- [05:19]
Andy
So we have to take, take Deribit's marketing pieces with a grain of salt there a little bit. Right.
- [05:23]
Greg
It's something to keep in mind. Yeah, I mean, so valid that those are dollars of capital that are deployed to the space, but it just naturally grows with, with the price as well. What we're seeing right now in the options market is really interesting if I'm looking at sort of the flows of the street versus dealers. We can see dealers are actually long gamma here at the 110 and 112 strike levels for the July expirations. This is this Friday, next Friday, so on, so forth. So the way that the market is repositioned right now is in a way that they're seeing lower volatility persist at least through the month. To me, this can be almost like a contrarian type of flow where everyone's wise to the game and now they just get on the wrong side at the wrong time. Obviously the price of bitcoin has been pretty bullish. We had that pullback slightly below 100,000 on the back of the Iran US strikes and then that quickly just bounced right back up. So to me that's, you know, very constructive in terms of price action. It's typically constructive in the equity space to have a low volatility grind higher in prices. And now that we're just sitting right back at all time highs and everyone's on the wrong side of the volatility equation, you know, maybe that is the catalyst for a little bit of a squeeze through that all time high.
- [06:44]
Andy
Interesting. Ether outperformed Bitcoin in the second quarter, although nobody really seemed to notice that much. But you know, some folks actually on this program have posited that that began with a short squeeze of long bitcoin short ether positions and sort of that bounce carried through into some buying and then into some ETF inflows. Has there been any pickup in activity in the ether options market that might have reflected some of that price activity? I. Yeah.
- [07:18]
Greg
So if I zoom out, year to date, ether still underperformed Bitcoin, but quarter to date, ether caught up a little bit, which was really nice. I think there's a few things going on there. The way that I view ether is I view it more as a web 3/tech play, whereas bitcoin is more of a mix of digital gold and some sort of tech play. So I think as the equity space rebounded from those April lows. Tech rebounded from those April lows. We saw ETH kind of benefit from that as well. One of the things that's really interesting is that if we looked at the CME open interest in the futures market, not necessarily the options market, but the futures market, Bitcoin has dominated a lot of that open interest forever. And finally ETH started to get a pickup in the CME futures open interest. Now I think there's a couple reasons for that. If I look at the basis between ETH and Bitcoin, they're pretty similar. Call it 30 day basis on Bitcoin, about 5%, 30 day basis on ETH, about 4%. But ETH is a staking asset that has a passive yield to it of about two and a half percent. So if you combine those two together you get about six and a half percent. So it's pretty interesting to be an ETH owner and sell the future against it and collect extra yield. Especially if the one year treasury rate is four and a quarter. There's a, there's a lot of juice there, there's almost know or a little over 2% to be made by buying ETH and, and selling futures. So I think that type of flow is naturally growing the derivatives open interest and so that might be part of the picture and that kind of lines up well with, you know, there's not a big move in ETH that would necessarily cause everyone to pile in as ETH made, you know, new all time highs, so to speak. But there is this type of flow where ETH has been kind of a laggard. But we're seeing growing open interest. I'm, I'm leaning towards, that's the flows that we're seeing.
- [09:09]
Andy
That's interesting because, because right. The big risk with those basis trades versus futures is that you know, you, you get big upside velocity in the price and you have to start covering your collateral on the short side and the trades can become very expensive to maintain. Right. So, so this shift from actually Coindesk had a great story about the, the bitcoin basis trade looking pretty thin. And so you're saying now that you get with it with an extra couple of percent. I think Caesar, our, our Ethereum staking rate is yeah, just around 3% right now. You're, you can add that on to your yield in the relative value trade and you're not that worried that all of a sudden you're going to wake up and ether is going to be back at 5,000 and you owe the CME a lot of margin.
- [09:57]
Greg
Right. So the cash management of that margin trade is definitely difficult. I think one of the catalysts for this type of trade is if we get those ETFs that have staking rewards around ETH and pay those out as dividends, that's more of a direct hedge all in one place. But if you're trading on deribit, for example, you can essentially collateralize your account with staked ETH and be short the future there. And the cash management component is a little bit easier to deal with. But yeah, that's a great point.
- [10:25]
Jen
You just mentioned some opportunities in the ETH environment. We talked about Bitcoin before that, but let's just like dig into that a little bit more. Like right now in the environment that we have, what are the opportunities that you are looking at? What should traders be watching?
- [10:38]
Greg
Yeah, well, I think that staking trade is a very interesting opportunity. It's, it's a nice low risk trade. But if I look at the space for development and sort of long term growth, you know, even though ETH prices are not performing so well, especially because a lot of the value proposition is the ETH burn with the EIP 1559, that a lot of the transactions are done on layer two. That being said, the development is done in an EVM environment, whether it's on layer two or layer one. We're seeing a lot of the outstanding stablecoins being in terms of EVM chains. So I think again that's another story that's pretty constructive to the space. So I think if you're thinking longer term and you're thinking about the web 3 stack eth is still going to be dominant. From my perspective, especially if all the developers and sort of talent is built around that, that infrastructure.
- [11:34]
Andy
Do you feel like everyday investors are going to pick up on that narrative? I think we've had plenty of stablecoin coverage broadly in the last couple of weeks and months to get people used to the idea that blockchain is being used for something. Right. And the majority of major stable coins are at least settled onto ether, so onto Ethereum. Is that, is that going to find its way through into the earlier or the, you know, stage one crypto investor as they decide what to do beyond Bitcoin.
- [12:09]
Greg
So I think this is, it's a double sided coin in the sense that a lot of the opportunity in crypto comes from the fact that it's really retail is the cutting edge of thought and investment.
- [12:25]
Andy
Discovery.
- [12:25]
Greg
Right, discovery, exactly. So, you know, hanging out in discords for new Projects and figuring out what's going on is still a great way to invest in altcoins. I think in terms of being the first wave of adoption before institutions come and push up the price. I'm not totally sure that these narratives leak through yet. Especially if I look at something like the derivatives market, the space is still extremely small compared to traditional finance. So if I go down sort of the exotic fundamental analysis of different cryptos, I think that's even more narrow of a field.
- [13:04]
Andy
I'd love to get your update on what's going on with perps and you know, to what extent. We can still read tea leaves by looking at per premiums and discounts and if there's, I know we're also looking at, you know, longer term basis from dated futures and things like that. Is there is, is, is there as much information value in these numbers as, as there maybe was a year ago?
- [13:30]
Greg
I actually think there is. So one of the things that's really interesting is looking at the fixed versus floating rates. So if you look at the accumulated perp funding over time, we usually look at deribit for a lot of this stuff. For Bitcoin versus eth, you can see that the total perp funding paid out by perp longs in bitcoin is about 3% higher than what you see in ETH. But if you look at the fixed term, the fixed term basis is nearly identical. And so what that's telling me is that the PER pricing mechanisms are actually more efficient and they're pricing a lot of this differential and staking yields and stuff like that on a more accurate basis. So I think that's pretty interesting to look at. The perp funding story has been a big story in crypto for a long, long time and it's the most liquid sort of Delta one product. So looking at the fixed futures for the most part, you know, maybe the front month future is pretty liquid, but if you go 90 days out or more, there's not a lot of liquidity there and you're going to be moving the market. If you have any sort of moderate size perps are really where everyone's transaction gamma hedging their option portfolios, things like that. So I think that's the most liquid market to look at. And if you look at fixed versus floating, there's some opportunities there to capture.
- [14:48]
Andy
And just help our audience make sure that they understand this right. Because even if they're perp users, they aren't necessarily data derivatives users. So let's just drill down into that a Little bit. You're comparing sort of, I guess instantaneous funding rates of perp values versus their relative spot values. It would be interesting to see how you measure that specifically. And then on the other side you're saying this futures contract expires a week from now or a month from now. And I'm going to actually measure that forward and annualize right there and then compare the per annualized forward versus the fixed annualized forward. Are we looking at that the right way? Help help the audience get a better intuition for that?
- [15:30]
Greg
Yeah, absolutely. So like in an arbitrage free world, the 30 day future should trade at a premium to spot. That's similar to the expectations of the constantly paid out perpetual funding. So if you look at a, the classic perpetual pays out every eight hours. DEIT has a continuous market but it should be theoretically the same over the that month long horizon. But what happens is throughout the month sometimes expectations change or sometimes pricing is just not as efficient. And so what I'm saying is that you can essentially sell the future and then buy the perp against it and you would collect more in the futures funding than you would pay out in the per funding. And that's that type of flip fixed versus floating trade.
- [16:16]
Andy
Interesting. So there's, there may be from an informational value point of view more I guess colorful things too or insights you can get from flows. Right. Because is it is. Should the audience still think of those perp funding rates as an indication of instantaneous supply and demand or, or is, or is there such a vibrant and, and well financed perp arbitrage community that it's more of a cash and carry market?
- [16:48]
Greg
So the fixed versus floating sort of arbitrage community I would still say is pretty small. A lot of the people who are trading perpetuals are just trading it for leverage. And so they're trading, you know, small moves intraday and opening and closing positions intraday. So a lot of that flow is going to be more trading related. What's really interesting is if you overlay the options market on top of this and you think about okay, we're getting a long gamma zone or short gamma zone, you can expect that the gamma rebalancing or the delta hedging flows are going to be found in the perpetual contracts just because of the nature of liquidity. And now you can see as we go into all time highs in a negative gamma zone, market makers might be expanding the funding costs because it's going in the same direction. And if it's vice versa, in a positive gamma zone they're going to be taking the other side. They'll be selling into that all time high rally or whatever, which will be decreasing funding. One more thing I want to touch on is that we've seen funding come down year to date along with volatility. And so to me that makes a lot of sense. As the asset becomes less volatile, the perpetual funding rate or the fixed basis funding rate that you're willing to pay for leverage should also go down. You know, you wouldn't pay 35% annualized carry for an asset that only moves 9% per year. You would never out earn your carry costs. So both coming down together in tandem is very congruent in my opinion.
- [18:20]
Andy
So in, in volatility space you're looking for I guess gamma opportunities. And to the extent your earlier point was that gamma trading I guess provides a natural more inelastic user of perps, right. Which can shove funding rates around. So the lower the volatility in mass that gets, the lower opportunity set there is for options traders and therefore the less of that I guess extension or elasticity of, of funding rates becomes. So is this a permanent condition?
- [18:54]
Greg
Yep, I would say it's a, it's a structural trend lower, but cyclically. You can see squeezes in either direction. And that's kind of what you've seen in traditional equities. You know, when the market crashes, volatility goes up because essentially everyone for the most part is long equities and they're essentially trying to get out all at the same time. While bitcoin like gold, can also squeeze higher and you can have volatility on upside moves as well. So when we're in equilibrium, obviously volatility is lower, there's less squeeze potential and that's going to be sort of the structural trend as the market matures and the asset class grows in value. But I do think there's going to be episodes where everyone's leaning the same way and are either caught off guard to the downside or the upside.
- [19:38]
Andy
When I think about volatility going lower, you know, one thing that strikes me is that is that reliable bitcoin volatility is a stated strategy for strategy. Right. Strategy. Issuing converts that can be hedged and made profitable by convert arbs requires a certain level of volatility from bitcoin. I don't think we're anywhere probably near the implied volume of the converts. There's probably still some room there, but over time that goes away. And does that, how much does that I guess affect strategies strategy?
- [20:15]
Greg
Yep. I think that's a great point. So just to kind of restate that, if you're issuing zero coupon bonds that are convertible, really the value that you're getting as the bondholder is that embedded optionality on the convertible portion of it. Now, the more that volatility goes down and microstrategy volatility follows Bitcoin's volatility lower, then that embedded option in the convert is less interesting. If the embedded option to convert is less interesting, does that mean that MicroStrategy can raise less funds to buy more Bitcoin? And does that essentially that cycle pause or stop? I think that's a great point. I think that's something to really keep in mind and that's. That kind of coincides nicely. I don't think it's a direct path today, but it coincides nicely that, you know, we're reaching all time highs, but the volatility is kind of coming down lower.
- [21:07]
Andy
You know, this is what we asked for. Now that we're getting it, we're not happy, right?
- [21:12]
Greg
Exactly. It's a, it's a very interesting phenomenon. I think it's worth at least knowing about and keeping an eye on.
- [21:19]
Jen
All right, Andy, I know you said you were a question hog, but I think you asked great questions and a hard time is up.
- [21:24]
Andy
Sorry.
- [21:25]
Jen
Jen, thank you so much for joining the show.
- [21:29]
Greg
Absolutely. Thank you so much for having me on.
- [21:31]
Andy
Thanks, Greg.