In this insightful episode, we dive deep into the crypto derivatives with Simran and Matt from GSR to discuss the current low-volatility state of the crypto market and its impact on trading volumes and options markets for Bitcoin and Ethereum. We also explore various narratives and events influencing market sentiment, including the potential approval of a Bitcoin ETF and the Ripple lawsuit. 

And finally, we talk about potential catalysts for higher volumes in the crypto market, such as institutional involvement and regulatory developments, and emphasize the importance of monitoring options pricing and spot market trading for informed decision-making. 

This is a massively insightful episode; if you are trading derivatives in the crypto space, you won't want to miss this episode!

Chapters:
0:00 - Intro
3:25 - Paradigm Flows and Realized Vol
7:30 - Proprietary Quant Data
16:08 - The Great ETH Flow Reversal
27:47 - The Macro (Equity Earnings or Central Banks)



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Paradigm is a zero-fee, liquidity network for crypto derivatives traders across CeFi and DeFi. The platform provides traders with unified access to multi-asset, multi-protocol liquidity on demand without compromising on price, size, cost and immediacy. The firm's mission is to create a platform where traders can trade anything, with anyone and settle it anywhere.


Disclaimer:
All opinions and actions expressed and undertaken by the guest and host are individual opinions and actions only and do not reflect the opinions and actions of Paradigm. Paradigm does not guarantee the accuracy, applicability, reliability, integrity, performance or appropriateness of the content of this video, nor shall Paradigm be liable for any loss or damage that may be caused directly or indirectly by your use of these contents.

Paradigm is not your broker, intermediary, agent, or advisor and has no fiduciary relationship or obligation to you in connection with any trades or other decisions or activities effected by you. No communication or information provided to you by Paradigm is intended as, or shall be considered or construed as, investment advice, financial advice, trading advice, or any other sort of advice.

Hi, I'm David Brickel, Director of Sales at Paradigm.

is still reverting, so the obvious trade is always the expensive 1 to carry.

This whole peak inflation, peak rates narrative, peak Fed, which we've

Crypto ball, a potentially fatal place to find the crypto option markets are definitely showing some signs of life.

I'm Joe Crui here at Paradigm and back here again with my co-host David Brickhel.

Today very excited to have Simran and Matt on from GSR.

I'm so excited that I even wore my GSR t-shirt today.

I think I got this down in, or is it consensus of in Austin last year, kind of right before like all the all the lending stuff, you know blew up So I think that was might have been like the last time I wore this thing So hopefully hopefully this isn't like a precursor of what what's the coming crypto again?

Love what you guys are doing, you know at GSR We used to have you know back in the day Chris Newhouse on the pod and before he went back to grad school and always represented you guys very well.

So looking forward to continuing to work with you guys and, you know, partner around content.

So kind of just to get started, if you guys can, you know, please just give a quick background on, you know, your journeys into the crypto world, you know, what you guys are doing at GSR.

So I've been with GSR for just over a year and a half.

Background in traditional finance is often the case.

And so I was on the oil options desk at Goldman for a few years.

And GSR having been founded by 2 ex-commodity distributors from Goldman, the legacy of client service, franchise, risk management, all of those things were very prevalent.

And so when I eventually made my decision to go down the rabbit hole after reading numerous DeFi articles and getting a sense of what is it about the space that's attracting so much talent and not just money, I decided to join TSR.

And so over the past few years, well, post year and a half rather, I've been focusing on our product and business development teams, namely looking at our suite of OTC services on Slack, programmatic execution, and derivatives.

I covered alternative investment strategies.

So like the broad suite of hedge fund allocations for our broad global private bank wealth management client base.

Towards the end of that, I actually helped the process of sort of onboarding the first Bitcoin hedge fund for those clients and started moving a little more in that direction, left to a different asset manager to lead up crypto research at a firm called Global X.

Actually went through the process there of filing for Spot, Bitcoin ETFs, Bitcoin Futures ETFs.

Was the portfolio manager on a Bitcoin Futures ETF there.

That was a pretty brief tenure when I got the opportunity to jump fully into crypto at a more crypto data firm like GSR.

And I've been here ever since, been here just about as long as Sam ran, about 18 months.

And I spend the vast majority of my day just writing crypto content, daily market updates, monthly market recaps, and research pieces pretty broadly in crypto.

So I guess like, let's just jump right into it.

You know, it certainly feels a little bit like crypto vol markets are kind of stuck in the dog days of summer here.

I mean, before we even hit record, Simran is like, you know, realized vol is kind of, is like in the 0.5, fifth percentile over the last, you know, couple years or what have you.

So I mean vol's across the curve, absolutely smashed.

You know, pretty non-eventful day, you know, for coins post FOMC.

I mean The amount of conversations that I've had with people were just like, guys, we are just bleeding.

Implieds are in the 30s, realized vol in the mid-20s.

And if you look at the paradigm flows, the market's certainly gone a bit quiet outside of some of these headline flows.

Generally volumes are kind of down across markets given the lack of volatility.

I mean, kind of like the headline print in BTC, you know, is this SEP 2635 bull risk reversal.

But I mean, you look at these contract sizes versus some of the flows that we were talking about back in March, like this number 1 print of 825 contracts wouldn't even make the top 5.

And in Ethereum, we have some of this March 1900, 2800 call spread being bought at the money lower strike.

But this is kind of, I don't want to say systematic flow, but kind of systematic flow to be honest.

So I mean quiet markets when vol craters is, I mean you guys have backgrounds in other asset classes.

This is not a pattern that is unique to crypto vol.

It happens in equities, happens in other markets as well.

So I mean, I guess to start, I mean, what have you guys been seeing in terms of your OTC franchise?

Would you echo kind of a similar sort of pattern where there's kind of a bit of apathy in markets?

Yeah, I would say a lot of it's driven by, as you mentioned, the summer lull and lack of activity in general.

And then also just realize while failing to perform, I think has just gotten people in a sense of bullet runs and asking the question, Where do we go from here?

And there's a bunch of competing narratives that are kind of guiding that discussion.

1 of those is obviously the news around the spot ETF and what does this mean for the broader macro system.

1 of those narratives is the Ripple lawsuit case and where the implications for altcoins and securities.

And I'll definitely defer to Matt on both of those in terms of the nuances in particular.

But just from a PureFlows perspective, I mean, there's certainly been some speculative upside.

I think even last week or earlier this week, I saw the 100K strike trade in March 2024 in small size.

And so, you know, even if people are taking smaller punts, I think they are still taking some punts.

And I was actually talking to ROTC traders earlier where, you know, the June, for example, 100K digital, we could probably offer that like 3, 3 and a half percent.

And so risking 30k to make a million dollars sounds like great trade.

The question is, what does the path from here to a year from now really look like?

What are the implications of the Split ETF?

And then, as I think you guys have covered quite well over the past few episodes.

The call overrider within, in terms of Ethereum call overriding was really the major vol flow that we've seen in the market over the past few months.

And then having to buy all of that Vega back, I think it was around 300 or 400k Vega that was bought back at a loss of like a year or so of all.

You know, that much Vega entering the market and leaving the market begs the question, well, are there any other flows that are really going to happen over the next few weeks to a few months?

I think most books are just keen to sit on the sidelines, see what market microstructures evolve.

And once they have a little bit more certainty with regards to spot ETF, the implications on altcoins, and then also a little bit of the Binance FUD that still exists after the SEC actions, I think that's when you're gonna see more of a revitalization in terms of volumes, actual spreadsheets.

And before we bring Matt in, I want to show just some of this, you know, some of this work we've we put together to, you know, effectively, you know, quantify, you know, the relationship between, you between crypto option block volumes and volatility because it's certainly something that people talk about a lot.

But We kind of wanted to quantify this relationship because we kind of have access to this sort of proprietary data.

So what we did is we looked at the relationship between paradigm crypto option block volumes in USD Notional.

So that's on the Y axis versus the changes in volatility on the X axis.

And we proxy this through Amber Data's Dval index, where, and if you guys don't, your viewers don't know, it's kind of just, kind of look at it similar to like a VIX for Bitcoin.

Your methodology is a little bit different, but kind of consider it that for this process.

And given the noisiness of paradigm volumes versus daily changes in DVOL, we kind of realized we needed to smooth out this data a little bit.

So we took the seven-day moving average of Paradigm Option Volumes as well as the 7 day moving average of the DVAL index level.

And then in step 2, we calculated the daily changes of both of these 7 day moving averages.

So the daily change of the seven-day moving average of the paradigm option volumes and the daily change of the seven-day moving average of the D-Vol index level.

A little bit of a mouthful, but it's what those daily changes, and then we regress them against 1 another in just a simple OLS regression, univariate regression.

And the relationship here is pretty evident.

It's not surprising, but it is interesting to kind of see these numbers where uptrends in implied volatility as proxied by this Deval index is leading to uptrends in paradigm volumes and vice versa like what we're seeing now, downtrends in implied volatility like we're seeing now is leading to significant downtrends in paradigm volumes and paradigm and, you know, crypto option volumes, you know, holistically.

And kind of just looking at some of the stats from the regressions, we have an R squared of, you know, 0.35.

And, you know, so 35% of the variation in the daily change of the 7 DMA of paradigm volumes is explained by this change in the D-Vol level.

But the T-score here is quite significant, right?

So there seems to be this statistically significant relationship here between paradigm vol changes and D-Vol changes.

And we include all the stats here for you math and stat nerds, if you guys are curious, if you guys want to screenshot that.

But it kind of just seems like until the volume, until the vols go up, you know, volumes are not going to be a good place according to this analysis, kind of, you know, irrespective of some of this like overwrite covering that we've talked about.

So I guess, Matt, like, If you could speak a little bit more to these catalysts that are gonna lead to this higher vol environment, because I feel like every week now, I'm seeing all these new price targets coming out, where it's like, oh, okay, BTC, 150K before the halving, and ETF, things like that, yet we can barely even move $300 a day.

Yeah, I mean, I think a lot of the narratives actually kind of do remind me of 2020 again, though.

When you think about from like the institutional side and when you think about the ETF side, A lot of that narrative that took Bitcoin from say, high or like low, low 10, 000s in that rally from late 2020 through 2021 to the high 60, 000s was a lot around hype around Bitcoin ETFs.

The prospect of a spot Bitcoin ETF kind of whittled by the wayside pretty quickly.

But then Gary Gensler started talking about Bitcoin futures ETFs, institutions started getting involved.

At that time, I was still at JPMorgan, and you were hearing from my other side of the job, all these tech hedge funds starting to buy Bitcoin and the regular hedge fund, not any sort of crypto related vehicle.

And I think that narrative is somewhat coming back with just the prospect of a Bitcoin ETF.

And if that is something that eventually can become approved and happy to spend more on the details there and go into that, I think it's just a narrative for the entire RIA community, a lot of communities that really don't have access to a great spot Bitcoin ETF vehicle to access this market.

And that's, in my mind, it was a substantially larger thing, particularly when you're thinking about like BlackRock and the big name traditional investment manager brands like BlackRock.

That's substantially bigger than say, an RA having access to a pro-shares Bitcoin futures ETF, for example.

So I really do think to the extent I don't want to forecast probabilities of the Grayscale lawsuit and probabilities of Gary Gensler's decision-making, But I really do think that's a substantially larger thing than almost everyone believes.

Also, a lot of these wealth management firms, they function on passive approvals for these types of products on like a name-brand basis where if you already are approved to offer iShares products to your clients you're gonna be approved to offer other iShares products to your clients and that's not a universal thing but I know it exists in certain places and maybe it makes slightly different rules for crypto but it's just substantially easier for people to put client assets in a product that comes from iShares.

Matt, would you have any kind of feel for the kind of potential timeframes we'd be working with or looking at for a BlackRock ETF to be approved?

Yeah, so it's, there's a lot of moving parts here because the grayscale lawsuit's a big component here.

The last I've heard, there's not any particular deadline.

A decision in the appellate court is expected in Q3.

So people were saying it could be any week, it could be any day, it also might be a couple months.

And then from there, That is something that then could be put up to the Supreme Court by either side, to the extent the Supreme Court accepts that case.

But that also is not even, even making it even more complicated.

Let's say Grayscale wins and the SEC doesn't appeal, that does not give a blanket approval for Grayscale to transition into an ETF.

What it does is it basically just takes away the SEC's prior rejection.

So what would happen from there is effectively the SEC would have 3 paths.

They could try to renege on their past Bitcoin futures ETFs, which I think is pretty unlikely considering the Hiss approved a 2X leverage product.

They could approve the product, that's another 1, or they could try to reject the product on some other grounds than the current grounds that they've been rejecting products on for roughly the last 10 years.

So that means there's kind of a very uncertain timeline there with Like, does the SEC win?

There's that set of timelines, and then there's an entirely different set of timelines related to the ETF filings that was, you know, it was catalyzed by BlackRock.

And that was a really big deal because they had never filed before.

There was very little information leakage that they intended to file.

And then all these other asset managers that had filed previously in 2021, followed on and filed behind them.

And that's more a function of trying to get in the SEC's review queue.

So effectively, once all these all these filings got recognized by the SEC in the past week, they have at most 240 days to reject them.

They have to go through a series of extensions to get it to that 240 day window.

But effectively let's say there's a max 240 day window from about, but that timeline can be pulled far forward depending on how the SEC, grayscale case goes.

And I know, sorry, I apologize, that was a very long-winded answer, but there's, I guess, 2 very gloopy components here, and it's kind of hard to forecast an actual date.

But it could be soon, And it really couldn't be later than 240 days, let's say that.

Yeah, well, I mean, you kind of just look, taking this back to the vol pricing, right?

I mean, I mean, Simran, you look at this, and you know, that that bottom chart is the 25 Delta skew.

And I look at where that SKU is trading, you know, around the dates of that potential approval, you know, and we're in a place where the BTC calls are trading, you know, 6 vols, you know, over the puts.

So it certainly seems like, you know, the pricing is there for, you know, a potential rally.

At least this is what the vol markets are pricing, not saying that we need to have 1, you know, where even across the curve, we're at the low point of the range.

You could make an argument that we are breaking lower.

We did close a candle last week before below 30k.

Yet, we're kind of in a place where it definitely seems where, you know, the pricing is, you know, the pain is kind of, you know, to the upside.

And at least that's what the at least that's kind of what the vols are pricing there.

But kind of just relating the crypto derivative volumes to this ETF.

What does this actually do to crypto derivative volumes outside of, you know, options on this ETF?

And sure, I understand it brings clarity, but like when I think about like an exchange like Deribit, where it's just like, okay, yeah, as soon as this ETF gets approved, there's going to be options that get listed onto this ETF in what, like a month or so or whatever that minimum window is required.

Wouldn't just all the volumes just go into options onto this thing?

I guess what is your longer term sort of view to some of these crypto native, you know, sort of exchanges if you do get this ETF?

I mean, I would be very surprised if you don't see a flood of interest in adoption from your traditional players and trading to the crypto derivative space.

I think that that's kind of going to be the inevitable trend.

And to your 0.1 of the trends that I expect to see off the back of that is probably a flood to liquidity on venues like CME, right?

Derivatives to be crypto native, and that's where most of the predominant volumes are.

But for example, if I only need to put a 35% margin to have a drivers' position on C&E, and I can get paid 4.5%, 5% on my collateral, and I can trade with the likes of Citadel or Cumberland or any of your traditional tribe-fied institutions that are entering space, I would be very surprised if the natural evolution of the space doesn't bring about a flood of volume into those venues.

And then also, I think you would just expect to see more overall volume on traditional institutions or in traditional exchanges like Durabit as well.

I think that's kind of just going to be the overall trend.

As for what the timeline of that looks like, again, I think to my point, the actual specifics of that might be uncertain, but within a year from now, if you can make some relatively cheap puns and some of those to your point are priced in.

Because typically I would say the predominant flow in crypto just tends to be yield capture and selling covered calls.

So whenever you see this upside convexity and calls trading over put, it's like, oh, it's quite eye opening in the sense of like, oh, people are actually willing to take a speculative view and do so in size to invert what is the normal skew that you normally see in the upper floor market.

And I think for David, do you have anything to say or It looked like you were about to say something.

About this, this idea that in, in the absence of any conviction, certainly to the upside, then the more sort of programmatic type flows, these overriding flows and vol setting strategies are just kind of constantly kind of way.

So it's in a market that's not doing anything, you know, and spots be very rangy, vols keep grinding lower.

The 2 things that have stood out to me, number 1, the pattern of our flows that we're seeing on Paradigm haven't really changed, right?

We're still seeing people wanting to buy a top side and make that play, albeit in not a huge volume anymore, it's kind of patchy.

But then also it is quite interesting that, as we're saying, that you're seeing the skew in favor of calls, which kind of speaks to actually probably better underlying sentiment for this space than what if you're just looking at pure A, volatility or B, looking at where the spot market's trading, you kind of think, well, no one's got any conviction, but actually that those kind of underlying measures maybe speak to something a little bit more positive.

And David, I partially agree with you kind of on the flows.

I think from like a directional standpoint, yes, we are still kind of seeing more of the same where people want to own these upside wings.

I mean, I'm just staring the SEP 2635K bull riskies.

We've been seeing bull riskies trade pretty much the entire year as well as 1 to 3 month 25 delta outright calls more so in BTC than Ethereum.

But moving back to Ethereum and what kind of Simran was alluding to around this overrider, I would argue that the flows that we are seeing from market makers in Ethereum have changed dramatically over the past month, absolutely dramatically.

And we call this slide, so the great reversal of paradigms, ETH Vega flows.

So even though the recent market flows have been generally quiet, we have seen this pretty considerable shift in Ethereum volatility dynamics over the past couple months.

And this shift really occurred primarily due to this imbalance on paradigm between vega supply and vega demand.

And this is primarily driven by what Simran mentioned this massive Ethereum overrider was significantly loaded up on risk then subsequently covered a ton of their positions.

So to be clear this overrider does not trade on paradigm which is why we feel we can talk about these sort of flows.

But let's look at the transformation of the data in the amount of Ethereum Vega that's being traded on paradigm by strike.

So that as the overrider added positions with market makers off of Paradigm, market makers came in and hedged this risk by selling at the monies with a preference for this 1900 strike.

So that left chart shows the Ethereum strike distribution of NetTaker vega that is being traded between the dates of April 30th and June 20th.

And this is primarily the range where a lot of these positions were being added.

So we see that as the overrider was adding their short call positions, market makers were then subsequently selling at the monies against this position, right?

You know, own the upside, you know, sell the at the monies against it.

Mostly in the September and December expiries where a lot of this flow was concentrated.

You know, there was a fair amount of flow in March as well, but kind of just for liquidity reasons, we saw most of the hedging in September and December.

This entity starts covering all their risk, and we even saw it today.

I mean, you see all these December 2300s going up today before we started filming, and rather aggressively these guys are covering.

Now take a look at the same Vega chart over the past month as the market maker unwound their risk.

Well, now all these short at the money hedges that these market makers are putting on are now being closed out simultaneously as the overrider is covering out their longer dated risks.

So in terms of Ethereum flows, especially in the longer dated space, the flows on Paradigm are pretty much exactly mirroring what we're seeing from this overrider.

So kind of like getting a sense of what this overrider is doing is literally at the top of mind of all our marketing.

Because if you know what this guy is going to do, right?

Well, you know, you kind of have a sense of what the vols are going to do.

I mean, I just kind of look at the December 2300, I looked at that fixed strike move today.

So we see a lot of our clients trying to form, you know, a strong view around this.

And, you know, that's part of the reason why we talk about it so much.

It kind of seems like we're beating it over the head with a dead horse, but it's literally at the top of mind of all these guys that are trying to manage these books.

to say, this very much reminds me of when oil producers are beginning to hedge.

When the country of Mexico is hedging, pretty much all the banks will know because putz Q becomes well-bid.

People are either building inventory or they need to hedge.

And so having a sense of this predominant flow in the market and the fact that it can move implied vols for ETH to trade at a discount or you can close at 30 to BTC seems mildly boggling when you look at it over the past year and a half or 2 years.

It's like, yeah, you should always trade at a premium to BTC, right?

Yeah, unless someone is selling 400, 500k vega into the market.

And that is really the only flow going through because there's no other broader narrative than someone just wants to.

For your point, I think like having a sense of what this operator is doing, I think, and it really being the only predominant flow outside of any speculative upside buying in BTC is really what causes this to happen and kind of drives what makes the most sense.

And it's been pretty interesting to kind of see some of this action that's been occurring on screen, right?

Because they obviously loaded up on all the risk in Q2.

We have this move, long dated vols kind of jack, and it's not really even deltas, right?

I mean, they were selling long dated vols at the lows, right?

They were selling long dated vols at like 44 and these things ratcheted it up to 50, 51.

And there was kind of this sense of kind of panic covering that was going on, whether, I mean, I don't know, maybe it was a margin issue, like maybe it was Darabit telling them to cover.

But what it's kind of interesting is, yes, they're covering a lot of the decent March flow, but it kind of seems like there's some program restructuring going on because we're actually seeing and you know, it's not confirmed.

It's you know, it's tough to really confirm this stuff, but it seems like they're buying back the August And then selling September.

So it seems like they're actually putting fresh positions on.

So when we saw this flow a couple weeks ago, we were like, all right, this program's over.

But then at the same time, like, I don't know, like overrider programs tend to be pretty sticky.

And on the other side of this, they are kind of making money on the coin, right?

I don't know how much Ethereum is up here today, but they are making money on their coin and these programs just don't go away.

If you're selling vol on the lows of spot and vol, yes, you could get whacked for sure, especially when you're crystallizing losses like this.

But like when I used to see this flow in equities and other asset classes, it's not like you to take a bad hit and you just, thing just completely disappears.

People also just tend to have very short memories and to your point, people will continue to sell vol pretty much in both free and easy.

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TBP | The Great Reversal of ETH Option Vega Flows w/ GSR - Ep. 32