The global market may have more turbulent months in the future. Due to the increased correlation between the S&P 500 and the crypto market in 2020, crypto traders should pay attention to risks.
Original title: “Hot Spot丨How will the US election and COVID-19 affect the crypto market? 》
Written by: Deribit
Translation: Encryption Valley Li Hanbo
BTC reached the highest price in the last year and finally broke through the price resistance of 12,000 USD! This was nearly two months after the price plummeted in September, when BTC pulled back to the 10,000 USD level after setting the price record at that time. Since then, prices have been on a slow upward trend, with monthly volatility increasing from 33% on Wednesday to 43%-the three-month low previously observed at the end of July. The ETH market also follows a similar pattern.
The steady growth of BTC occurred during the global Covid-19 crisis, partly due to more institutional investors entering the crypto market. However, this also brings new risks. 2020 is the year when BTC and the S&P 500 index reach the highest correlation. On Wednesday, the correlation between one-month BTC and the S&P 500 index was only 7%. However, the annual correlation has remained at an intermediate level of 45%. As the global outlook for the fourth quarter is still inconclusive in the near future, the market correction or accelerated recovery may once again test the argument for the hedging of crypto assets.
When there is a major unexpected price drop in the stock market, investors often liquidate the best performing assets to make up for the losses of other assets. BTC has been performing better than most assets this year, so if the market declines again, BTC may be affected similarly to March. Therefore, the fall in the stock market may trigger BTC’s profit-taking flight. This shows that there is a greater opportunity when the correlation between cryptocurrency volatility and the stock market is low.
S&P 500 Index and BTC Correlation (1 month and 1 year)
Macro outlook
The upcoming months may bring major changes to the current COVID-19 recovery cycle. The most discussed event, the US presidential election, is only two weeks away. However, its impact on the global economy may be relatively short-lived, and the stagnant growth of the technology industry, the delay of the COVID-19 vaccine, and the further delay in the rescue of COVID-19 people may have a more lasting impact on the global economy.
From November’s S&P 500VIX, the impact of expected changes in the results of the US general election can also be observed. The index fell from the closing value of 36.15 on September 3 to 29.85 on October 20. Concerns about uncertain election results and how long this uncertainty may last may be responsible for the surge in expected volatility after election day. Nevertheless, with more polling data, this concern has been reduced, but the overall volatility level is still high, the S&P 500 VIX future index for December is 29.1, and the future index for January is 28.6. The average VIX index over the past ten years has fluctuated between 15 and 20 points.
The expected volatility of the global market shows that there may be more turbulent months in the future. Due to the increased relevance of encryption technology in 2020, encryption traders should pay attention to risks. The US election will always increase volatility. Therefore, options that expire a few days after the general election will always be traded at a premium compared to options with a longer expiration date to compensate for the volatility, allowing the seller to bear more significant price fluctuations and remaining low time value.
In the first week of October, the trading price of the rights on December 18 is 2 volatility points higher than the rights on November 4, which is unusual pricing during the election period. However, these expectations have changed in the past two weeks, and now only the trading price of the rights on November 9 is 0.5 volatility points premium over the rights on November 4. The change in the premium structure shows that this election is expected to have a similar impact on the market, while the expected volatility of a longer date indicates that more influential events will occur in the future.
Impact on encryption technology
The following table shows the 10 best and worst S&P 500 trading days by yield in 2020, and the returns of BTC and ETH on the corresponding trading days.
S&P 500 Index – 10 best and worst trading days by yield
BTC and ETH fell by 30% on the worst trading day, and rose by 20% on the best trading day. This coincides with the S&P 500 index, which shows that market turbulence will have a corresponding impact on the crypto market. obvious. In mid-July, the one-month correlation between BTC and the S&P 500 index increased to 79%. For this reason, this may affect your crypto investment portfolio.
What will affect the market?
Technology stocks-have been the main driving force of the stock market recovery during the Covid-19 crisis. However, over-reliance on a certain industry, if the industry’s growth declines, may lead to a sharp correction in the market. For more than a decade, the technology sector has performed better than the broader market, and this rapid growth may no longer be sustainable. In particular, the personal computer industry has performed well in the past three quarters, despite slow growth in other areas, and the severe criticism of Section 230 (protection of freedom of speech) against IT companies. Tighter regulatory measures and a return to the pre-covid growth rate may lead to a substantial drop in expected earnings and put downward price pressure on the entire index. In recent weeks, more hedge funds have begun to short the industry, triggering a shift in market sentiment.
Biotechnology-The Covid-19 vaccine may eventually return the world to a normal lifestyle. Therefore, it is not surprising that the market rebounded after the news of the first expected result of the third phase trial came out around the end of November. However, Johnson & Johnson and AstraZeneca, the two major developers of Covid-19 vaccines, have previously faced trial setbacks. If more problems arise, more delays may cause the market as a whole to be bearish.
United States-Although the parties have not yet reached an agreement on a stimulus package, since May, the market has begun to recover without injecting any large-scale liquidity into the economy. At present, the general account of the US Treasury Department has accumulated more than 1.68 trillion US dollars, ready to be injected into the US economy. This may positively promote and accelerate the overall recovery of the market, and Bitcoin will also benefit due to potential inflation concerns.
Expectations for BTC
An active options market can reveal a lot of information about the underlying market, and can provide valuable insights and market expectations on how to adjust your trading strategy. Implied volatility allows us to analyze the market prospects of crypto traders because it is a forward-looking measure derived from the market price of options. It shows expectations of market uncertainty and changes over time and the potential market impact of specific events. This is called the term structure of volatility and can be compared with the term structure of bond interest rates for each term.
The picture below shows the term structure of Deribit BTC options. Due to the time value of options, the term structure tends to tilt upward. However, the hump shows that prices are expected to fluctuate sharply within a certain period of time. Similar to the traditional market, the BTC market has priced the potential volatility of the election week from October 30 to November 6. The increase in volatility is expected to continue at least until the end of the fourth quarter.
BTC Orderbook Term Structure by Genesis Volatility.
Implied volatility can be used as an unbiased estimate of the realized volatility in the future, and can be used as the basis of your trading strategy.
Fluctuating trend
Starting this week, BTC’s daily implied volatility reached the lowest value of YTD-2.9%. Although it rebounded quickly, it was still 15% lower than the annual average due to the past sideways of the market. The implied volatility of ETH also follows a similar pattern. However, as the hype of DeFi slowed down in the early autumn, its implied volatility even fell below its realization volatility.
As we all know, the average value of volatility is slowly recovering (a trend that has been observed in the crypto market-a significant volatility peak after a period of low volatility), the current volatility shows a good entry point for the crypto options market.
Implied volatility of Bitcoin and Ethereum
After the latest price surge, the crypto market is bullish, showing a 25-delta sloping premium of -9.1%. Compared with the 9.6% 25-delta tilt premium a month ago, there is a big change. Although it is well known that crypto traders have stronger risk tolerance, this is in sharp contrast to SPY’s 25-delta skew premium of 9.8%. As the general election approaches and uncertainty increases, market sentiment has turned more bearish. In potentially turbulent macro events, such as the upcoming general election, those crypto traders who are more inclined to avoid risk can benefit from using options to hedge market risks. And according to changes in market sentiment to change the position to minimize the high premium cost of long-term options.
Those who have no opinion on the price direction but believe in increased volatility can benefit from multiple volatility trading strategies. More experienced traders can benefit from dynamic hedging, gamma scalping, and volatility arbitrage between highly correlated assets such as ETH and BTC. Traders who trade for the first time with volatility can bet on large price movements by using straddle and strangling strategies. These strategies have limited risks but have significant upside potential.
Source link: insights.deribit.com
