August Outlook: A violent wake-up is near
The anemic summer revives the attractiveness of straddles as we approach months filled with known knowns and unknown unknowns. Further, the slow market is promising to further build exposure as we head towards a robust cyclical period for BTC. July has been anemic
We have witnessed a true drought in the market during the summer holiday of 2023. Trading volumes are remarkably shallow. BTC’s 30-day volatility currently sits near five-year lows, at levels only experienced eight days since January 2019, and derivatives activity resembles the low season after the apocalyptical FTX days.
A deep crypto sleep tends to be followed by a violent wake-up
The low activity matters in several regards. Slow periods are typical, but this slow period is atypical. Similar occurrences of activity drought as the current are few and far between, with a common denominator of previous events ending in a scene of dramatic volatility.
This typically occurs as traders tend to be preoccupied with the current theme of the market, overemphasizing short-term dynamics, in turn overexposing themselves to high leverage or crowded short volatility trades. As more and more traders are groomed into participating with either high leverage or options selling, pressure gradually builds, culminating in a proper eruption of volatility.
Sir, Wen volatility?
My short-term thesis is that the market’s volatility pressure is about to climax and that an eruption is near. The tricky job is to build an informed view of when the pressure gets too strong. Known catalysts could ignite the vol bomb, but often, purely structural squeezes tend to be the force moving the needle. They are utterly challenging to target in advance, favoring passive long-vol exposure through straddles.
A couple of known knowns await. All ETF filings near potentially interesting market days, with ARK 21Shares’ second SEC verdict having its deadline on Sunday, August 13. All the remaining active ETF filings in the U.S. are poised to receive their first verdicts by September 1 and 2. The ARK decision on August 13 and BlackRock decision on September 2 are the two most likely events to spark volatility.
I expect postponements of all active filings, at least until the ongoing Grayscale vs. SEC lawsuit reach its conclusion. Thus, I expect the volatility impact of these events to be less potent for the market. Nonetheless, I favor holding significant exposure in BTC and accumulating more aggressively throughout the summer in case of an earlier-than-expected verdict.
The dangerous unknowns. Currently, Curve Finance is distressed, with major loans potentially entering liquidation. These liquidations could have dramatic negative spill-over effects on the market, pushing volatility higher. These events are hard to predict in advance. Similarly, the Grayscale vs. SEC hearing verdict could occur any time in the coming months, representing a further potential volatility catalyst for the market.
Additionally, structural pressure from derivatives has ignited previous volatility breakouts from droughts. June 2020 saw a massive short squeeze, similarly did April 2019, July 2021, and January 2023. All squeezes occurred without any substantial news initiating the moves. Currently, the open interest in derivatives sits stable, with a constant slightly below neutral funding rate. This is not a concrete signal of any imminent squeezes for now, but it is worth monitoring closely as we advance into August.
To summarize, volatility could erupt amidst the known catalysts or on its own, fueled by internal unforeseen forces. The unknowns may be handled by adding exposure to unprecedently cheap options, and traders should step into the coming months with patience and discipline.
Actionable, prudent, and harmonic strategies for the current slumber
3mth IVs sit near all-time lows as volatility crumbles lower. In other words, market participants expect the past to continue to dictate the future. This trend allows contrarian ideas to be executed, buying farther dated out of the money call and put options to be rigged for a changing volatility climate in the future.
Further, gradual but aggressive BTC accumulation is my preferred strategy at the time being. Leveraged exposure currently strikes out as an unwise solution, as volatility very well could ignite in both directions. Nonetheless, spot exposure and patience allow me to express my bullish outlook on the cyclical forces in 2024, ahead of and after the halving, sprinkled with very potent ETF developments and reduced macro constraints.
