May 26, 2023
Greg Cipolaro

Research Weekly - Volatility Sinks, Opportunity Rises


  • Volatility sinks to levels rarely seen, creating an enticing opportunity for investors.
  • As Bitcoin Pizza Day reminds us, psychology might be a hurdle for payments.
  • What does Hong Kong’s upcoming licensing regime say for crypto markets?

Declining Volatility Creates Opportunity

Bitcoin’s volatility, as measured by the implied volatility of at-the-money options expiring in one month’s time (1m ATM IV), continues to fall, reaching levels rarely seen over the past few years. We noted this a few weeks ago, but with the bitcoin price continuing to languish since the fireworks of the regional banking crisis subsided a few weeks ago, the trend of declining volatility continues. This week the measure fell below the first percentile of observed 1m ATM IVs since March 2019.

Weekly 1-May-26-2023-01-13-07-1304-PM

With the stagnation in bitcoin price, especially as other assets continue to rally, like tech stocks, traders appear to be increasingly on edge, with recent news articles highlighting bearish options data and technical analysis. While our crystal ball is no clearer than anyone else’s, especially over short time horizons, one does not have to express a directional view to take advantage of the current market dynamic of historically low volatility.

Options strategies like a straddle, the simultaneous purchase of a call and a put, potentially allow investors to profit if underlying prices move enough in either direction. However, if bitcoin volatility stays the same or declines, investors could see their premium value erode, and the payoff could be below the premium spent for the position. Given how depressed (cheap) implied volatility is currently, and several catalysts that could send bitcoin higher OR lower, including the debt ceiling negotiations, changes in the regulatory backdrop, and disbursements of the Mt Gox coins, a long straddle may make sense for some investors. Add on top of that declining market liquidity, which has fallen about 50% year to date according to data provider Kaiko, we think there may be a lot to like about owning volatility now.  

The Psychological Hurdles for Bitcoin Payments

This Monday was the anniversary of a seminal moment in the history of Bitcoin, the first real-world transaction using bitcoin for payment. Dubbed “Bitcoin Pizza Day,” the event celebrates the 2010 purchase of 2 Pappa John’s pizzas for 10,000 bitcoins (original thread here) by the developer and early supporter Laszlo Hanyecz (laszlo). Because his local pizza shops did not accept bitcoin at the time, college student Jeremy Studivant (IRC handle jercos) accepted the bitcoins and then completed the transaction using his credit card. According to reports, Laszlo went on to spend 100,000 bitcoins on pizzas alone in the summer of 2010, a value of over $2.6 billion at today’s price. When confronted with that statistic, $2.6 billion today for 20 pizzas 13 years ago, many often react with ridicule (one only has to scroll down ¾ of the way through the first page of the original 73-page bitcoin forum to see). While the success and the future price appreciation of bitcoin may not have been evident in 2010, this human reaction to events like Bitcoin Pizza Day, and hindsight bias, is an important barrier to having bitcoin more readily accepted as a medium of exchange.

A common critique of Bitcoin, one often used as an objection for investment purposes, is that it is not highly utilized for payment applications. While Bitcoin was originally conceived as a “peer-to-peer electronic cash system,” it’s best known for the eye-popping returns the asset has produced, rather than a payment system of the future. Supporters often push back with technical hurdles holding Bitcoin back, the slow speed and costs that can at times be uneconomical, which are being solved with the Lightning Network. There is an essential psychological element that is a hurdle to its broader adoption as a medium of exchange, the fact that one could have gotten fabulously wealthy if one were to obtain a large amount of bitcoin in the not-too-distant past. Hindsight bias, the tendency to look back at events and think they were predictable all along, is an often-overlooked human element holding back the broader adoption of Bitcoin for commerce applications.

That isn’t to say there’s a lot to be done on the technical side to make bitcoin more seamless and usable. Just this week, our sister company, Wolf, graduated its first cohort of Bitcoin and Lightning-driven startups, many focused on improving Bitcoin’s usability as a payments network. At some point, we expect the complexities of using Bitcoin and Lightning, and even bitcoin ownership, to recede into the background, and new assets, like a US dollar stablecoin, will be made available using Taproot Assets or other Bitcoin-related protocols. At that point, the user experience will look like any other modern payment app, but with all the benefits Bitcoin brings. We can imagine a state in the not-too-distant future where hindsight bias will no longer be a hindrance to Bitcoin payments.

Is China Ready to Embrace Crypto Once Again?

This week, news broke that on June 1 Hong Kong’s Securities and Futures Commission (SFC) would begin accepting virtual asset service provider (VASP) license applications for exchanges that hope to serve retail investors. We find this interesting given China’s troubled history with crypto (we acknowledge there is a difference between China and Hong Kong), which started with a general constriction around the industry (2013), an Initial Coin Offering (ICO) ban (2017), and then a full prohibition of trading and mining (2021).

Hong Kong’s VASP framework has been in the works for several years now, and now with the licensing scheme set to go in place next week, it appears to be further ahead of many other jurisdictions, including the US. It is unclear how impactful Hong Kong's actions will be to crypto markets, but Hong Kong and China have been important factors in the price movements of bitcoin in the past, so their re-emergence is notable.

Market Update

Weekly Markets-May-26-2023-01-09-13-9744-PM

Bitcoin price action was once again subdued, with bitcoin falling 1.0% on the week. Equities were mixed, with the S&P 500 down 2.0% and the Nasdaq Composite essentially flat, up 0.1%. Gold fell 1.0% on the week while oil held steady, up 0.1%. Bonds were down on the week as debt ceiling negotiations heat up. Investment grade corporate bonds fell 0.7%, high yield bonds fell 0.7%, and long-term US treasuries fell 1.5%. Real yields rose while inflation expectations held relatively steady.

Important News This Week

Regulation and Taxation:

The Bitcoin Mining Debate Is Ignoring the People Most Affected - CoinDesk

Hong Kong's SFC Set to Finalize Rules for Crypto Exchanges, Accept License Applications - CoinDesk

Hong Kong Steps Up Crypto Hub Push in Contrast with Clampdowns in Asia - Bloomberg

IOSCO Sets the Standard for Global Crypto Regulation - IOSCO

Coinbase Mandamus Reply - US Court of Appeals


Take a Look at Wolf’s First Cohort of Bitcoin-Driven Startups - TechCrunch

Family Offices Turn to Crypto as Client Demand Grows - Ocorian

Celsius Assets to be Managed by Arrington Capital-Led Consortium - Bloomberg


DCG Misses Genesis Loan Repayment - Gemini

Crypto Giant Binance Commingled Customer Funds and Company Revenue - Reuters

MicroStrategy Letter to FASB Regarding Accounting Treatment - MicroStrategy

Brink to Receive US$50,000 Donation to Continue their Fundamental and Valuable Work Supporting Bitcoin - BitMEX

Upcoming Events

June 2 - Jobs report
June 13 - CPI reading
June 14 - FOMC rate decision

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