Joshua Lim
@joshua_j_lim
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in crypto: co-founder, @arbelosxyz ; head of derivatives, genesis trading; galaxy digital; circle. previous life: equity exotics GS; UBS
Joined April 2012
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Last Seen Profiles
in last 24h, our vol trading desk printed 3 separate crypto option tickets of $80mm notional size or higher... the institutions are here
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1/ BTC and ETH long-dated implied vols are plumbing multi-year lows. what is causing this and where do we go from here? a thread:
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1/ quick thread on the GMX "exploit" last night
having sat on crypto dealing desks for many years, I know that offering liquidity to savvy traders is a painful but necessary part of the game
GLP holders learned that same lesson last night!
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1/ this is how I think the mango attack played out, please let me know if I got anything wrong:
at 6:19 PM ET, attacker funded acct A (CQvKS...) with 5mm USDC collateral
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this is the real flippening that everyone should be focusing on
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1/ BTC has lagged the performance of other crypto assets through the last cycle
most traders intuitively feel that BTC trades “heavy” – why is this happening?
there’s two simple metrics we can look at to validate what we intuitively feel:
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you can literally carbon date when someone got into crypto by how much they care about Tether FUD
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1/ the CME futures roll traded at dizzying, near-historic wides during last week’s Nov to Dec roll window, touching 23%+ annualized at times, making it briefly one of the most attractive risk-adjusted trades in crypto
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9/ and when both of those things coincide… oh boy you better get out of the way. BTC vols can rally 50-60 points pretty much monotonically:
Oct 2020: 60v -> 120v
Apr 2021: 70v -> 120v
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1/ what's next for crypto mkts: contagion risk edition
today’s relief rally across risk assets saw equities regain the 4k level in S&P 500
VIX is showing a risk barometer reading of 29, down as much as 6 points from last wk, when SPX was 3% higher!
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1/ today's massive BTC options print on CME demonstrates a larger trend happening in crypto options
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imagine being investor
#70
getting turned away for memeability reasons
JUST IN:
@SBF_FTX
's crypto exchange has raised $420,690,000 from 69 investors in a Series B-1 funding round that values
@FTX_Official
at $25 billion.
@realDannyNelson
reports
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BTC climbing wall of worry and drifting back into middle of spot trading range means vols lower... throw in overhang from vaults and overwrite supply. Feb $50k calls crushed by 12v points in last 24h to 60v implied. with 10d and 30d realized around 61v, feels like a good buy
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6/ for instance, a long BTC holder could sell a 30-Dec-22 $40k / $100k strangle to collect around ~$11k per unit (vs 43,100 spot ref). so you effectively pick up another unit at $29k or you get taken out of risk at $100k… that doesn’t seem so bad!
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7/ so where do we go from here? looking at the historical chart, BTC implied vols generally bottom in the low 60s. with it trading 70v now, it is getting attractive but not quite a screaming buy yet
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11/ the last point is important: this problem is one that comes up more and more as GMX grows larger and attracts savvy traders. it's a good problem to have! defi liquidity venues are going to have to converge on cefi best practices over time as market sophistication increases
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8/ one thing we know: when vols start getting bid, it’s usually in a positive spot/vol correlation regime w spot rallying to new ATH. You saw this in Oct 2020 (spot breaking through $10k) and again in Apr 2021 (post Coinbase listing de-risking)
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we need to see MSTR borrowing UST from Anchor to buy more BTC while Do adds MSTR converts to the LFG stability fund before we can safely call the top
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imagine paying 45bps a year for a defi etf where the top holding is nokia
Lmao the GS “DeFi” ETF is a concentrated QQQ lol reminds me of the “Vegan” ETF from a few years ago that was mostly the top 15 names in Qs as well.
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7/ of course, after the attack MNGO/USD traded down to $0.02, which means acct A is now ITM on its short MNGO perp position to the tune of $12mm
but there is literally no liquidity left to pay acct A out, so attacker will have to be satisfied with the $116mm he took from acct B
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when defi2.0 bros start talking about protocol controlled liquidity
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imagine dumping $2.5mm of BTC gamma unceremoniously into the mkt, pushing vols down 4 points, then watching it rip all the way back
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2/ in previous years, our trading desk would see regular supply in 6-12 month vega from dealers hedging books. there's less systematic flow of this type hitting screens now -- this goes hand in hand w dealers having larger balance sheets and being more willing to warehouse risk
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options add a powerful orthogonal risk expression to crypto portfolios
below is an idea from 9 Apr
a month later, BTC/USD is -11.3%, but if you had put on $10mm notional of this bullish structure, you'd still be up +$232k
long-dated vols are down ~20 points
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3/ on top of that, with BTC and ETH spot stuck squarely in the middle of their 1-year trading range, there has been little appetite from crypto hedge funds to buy and hold long-dated options
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5/ at MNGO/USD price of $0.91 per unit, account B was in the money by 483mm * ($0.91 - $0.03298) = $423mm
that was enough unrealized P&L to take out a loan of $116mm across a bunch of tokens, which then left mango and leaves the protocol at a deficit
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10/ finally, BTC forward prospects are challenged, the mkt knows it:
a) BTC’s store of value proposition is being trumped by ETH’s sound money narrative
b) long-only funds finally understand what ETH is this cycle and are favoring it as the new entry point into the asset class
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2015-2018 tightening cycle coincided with historic bull run for BTC... what happens once tightening starts this cycle? good chart from
@David_Grid
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congrats to nat gas on the launch of its new ecosystem fund
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really interesting option prints today: someone traded total of 25,000 x 50,000 of the Jun ETH/USD $10k / $20k 1x2 call spread. buyer effectively collecting around 15v of skew to get short dvega/dvol on this trade. roughly $155k by $135k vega; 38% of 24h volume at time of trade
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will we see a meaningful decoupling of ETH vs BTC in 2022? how will it be expressed in derivative markets? a quick thread:
in Q2 2022, ETH is expected to undergo a major transformation, switching from POW consensus to POS:
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6/ it looks like that effectively wiped out all available liquidity on mango
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nft investing is not hard, just buy the jpeg with the highest IRR based on a discounted cash flow model
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7/ so the real issue is GMX doesn't reflect the true cost of liquidity like other venues do, it offers unlimited liquidity at a mid-market oracle price
how can GMX fix this?
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4/ meanwhile the narrative of “option vault auctions are dumping vega into the mkt!” is really dragging the entire curve lower, though it’s clearly also steepening in the front as you would expect (pink curve is today, blue dotted curve is 2 weeks ago)
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today saw a large seller of BTC long-dated volatility in the June 2023 at-the-money ($19k) straddles
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8/ first, GMX can look at orderbook depth on CEXes, reflect the cost of liquidity in the executable price, and pay any spread collected to GLP holders
this removes the incentive to do this type of exploit, though it runs contrary to GMX's marketing as a zero price impact product
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5/ this isn't an exploit as much as GMX working as designed! X executed large trades in against GLP holders with 0 slippage: at the oracle price without factoring any price impact
in the real world, putting on risk requires you to pay liquidity providers on the opposite side
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1/ high positive spot-vol correlation clearly indicative of dealer positioning
as spot rallies to strikes where dealers are short in Nov and Dec, market gets shorter vega and vol follows as dealers are forced to cover
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12/ can BTC remain king going fwd? only time will tell if the ETH narrative post-Merge is strong enough to overthrow the status quo
in the meantime, expect BTC to continue to trade like a funding asset and preferred hedging instrument for the entire asset class
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5/ while we're on the topic of retail-facing vaults, some short-vol long-dated structures are still pretty optically compelling for retail, even though vols have gotten crushed
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2/ last night, trader X successfully extracted profits from GMX's AVAX/USD market by opening large positions at 0 slippage, then moving AVAX/USD on other venues in their favor
this created a sinusoidal pattern for over an hour as X switched from long to short 5 times
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2/ attacker then offered out 483mm units of MNGO perps on the order book
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9/ second, GMX can try to identify toxic customer flow and cut it off or widen their spreads specifically -- similar to how forex brokers segment customer flow into a-book vs b-book
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c) every cryptonative fund in the world is positioning for the Merge in some way
d) ETH is looking deflationary post-Merge, while BTC has an uncertain supply event from the Mt Gox distro hanging over it
e) we just had 9% inflation, and BTC "failed" as an inflation hedge
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4/ at 6:26 PM ET, attacker started to move the price of MNGO spot mkt, it traded as high as $0.91
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keep hearing how NEAR USN bootstrapping at 20% yield is bearish for Terra UST
why couldn't it be a positive for both ecosystems? maybe UST reserves hold USN and vice versa, reduce net marketing spend for both
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opportunity cost lost by consumers not invested in crypto: $1.8 Trillion
Money lost by consumers through crypto scams last year: $80 Million
Money lost by consumers through overdraft fees last year: $12 Billion
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sometimes it kind of feels like the market is trading a long BTC / short ETH / long SOL butterfly position
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8/ the takeaway here is post-FTX there's a real market demand for trusted venues and counterparties in crypto
whether that means onchain transparency of defi perps / DOVs / option orderbooks or the perceived safety of CME, it remains to be seen!
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you never forget your first crypto CEO — real pleasure to catch up w the legendary
@jerallaire
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3/ at 6:24 PM ET, attacker funded acct B (4ND8F...) with 5mm USDC collateral to buy those 483mm units of MNGO perps, at a price of $0.0382 per unit
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.
@circlepay
to rename itself "Sphere" as it focuses on maintaining dimensional parity with other payments companies
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me: mom, can we get some arbitrage-free vol surfaces
mom: we have arbitrage-free vol surfaces at home
the arbitrage-free vol surface at home:
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observation on today's spot sell-off vs Mar 20:
fwd curve getting compressed now vs widening on Mar 20. also call skew getting bid up now vs higher strikes crushed on Mar 20
speaks to cleaner mkt positioning and more gross derisking vs just spot selling from etf outflows
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welcome to crypto land, where ETH realized is ~80v and march call wing is 131v
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10/ third, GMX can cap max position size on any particular asset to a small fraction of liquidity available on CEXes so that any extractable profits are small relative to the cost of moving the asset price on CEX
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in crypto if your max upside is 100%, you’re not making the right bets
Imagine being a tradfi manager who finally works up the balls to wade into crypto a land where we have our own term for money that falls from the sky and you stare at the board of unlimited opportunity and you decide finally to make a move and short tether just can’t be more ngmi
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6/ why use GMX and not FTX perps? because you can't trade at an oracle price on FTX, you pay some slippage as you execute up the orderbook
you'd move price from $17.95 to $20.25 to buy 200k units of AVAX-PERP. So you'd lose on the FTX leg AND on the other venues you're moving
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3/ let's take a look at the first cycle which took place from 01:15:31 to 01:28:11 UTC. X was able to extract roughly $158k in profit by trading clips of $4-5mm at a time
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BTC Oct vol down 5 points on the day. don't think I've ever seen a move this drastic at such a low abs vol level (mid 30s vol). seems wild with ETF chatter for Oct picking up
the weekend vol crush is real, dealers are just choking on gamma
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8/ what does it all mean? tradfi is already long and probably thinking about when to exit this trade
around etf announcement expect retail to pile in.. and expect tradfi guys to exit (2021 tops in basis were prior to $COIN and $BITO listings)
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1/ random thoughts on mkts here:
liquid crypto mkts have been more difficult to navigate since Dec. allocators are reluctant to aggressively deploy risk into crypto with FOMC and Russia/Ukraine headlines driving macro assets across the board. BTC is moving on a 2ish beta to SPX
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dramatic move in the front: ETH/USD 6Oct up 10 vols over last 24h, with 27Oct flat at 28v
we get it anon, you're bullish on ETH ETF this week
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5/ what explains BTC's persistent heaviness? we present three qualitative reasons:
first, the institutions are no longer “coming”… they are already here. BTC is accessible to everyone using CME futures, exchange-listed products and even via direct investment (see Coinbase AUC)
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FED'S POWELL: WHY HAVEN'T YOU SOLD YOUR CRYPTO YET, ARE YOU DENSE
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10/ a good trade could be the 20-May ETH $2000 / $1600 1x3 put spread (you sell ATM, buy tail puts). You collect $31 to buy some crash protection
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@alexwlezien
maybe: put position limits on derivs based on spot liquidity (at venues used in oracle), so exploit pnl is commensurate w bid/offer spread paid to manipulate the mkt
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4/ X did this 5 times (with less impact each time), so let's say they extracted ~$500-700k profit. Ofc X was paying spread to market-makers on the other venues they were trading on to move the price of AVAX, so the net collected is less
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1/ ETH/BTC spot ratio is a major battleground right now
on one hand, dealers are long $20mm of gamma from 1650-1800 strikes. as BTC/USD rallies, the supply from gamma keeping a lid on ETH
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hope you guys locked in term funding for USD... 3.3bn in CME open interest pre-ETF + rally past ATH could mean big USD collateral shortage in crypto world
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9/ on the flip side, downside risk from DeFi liquidation levels remain
If the de-risking continues over the weekend and ETH flirts with liquidation levels around $1500, things could get March2020-esque quickly (h/t Nico)
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the best part about the etf is the transparency with which you can track how stupendously bad your carry costs will be
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6/ as the historical gateway asset into crypto exposure, BTC is already a sizable % of the crypto allocation for most tradfi investors – this not only means it’s the asset that gets de-risked when the market turns, but also the asset that gets shorted as a beta hedge
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4/ in crypto-native institutional world, we think the damage is concentrated in venture books with low cost bases
venture books have given up a lot of unrealized gains but this alone is unlikely to cause contagion
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maybe the easiest way to think about this:
say there was only 1 share outstanding, and the company held $1 of BTC. hence 1 share entitles you to $1 in BTC of NAV
company now issues N new shares, selling each for $(1 + p), where p is the premium to the pre-issue NAV per share
Buying MSTR is like buying overpriced BTC but you get a bonus of arbitrage profits against the BTC underlying from whoever buys after you. This is why it makes sense that MSTR trades at a premium.
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bitcoin fixes this
BREAKING: Over $100 million worth of gold has been stolen from Pearson Airport, Canada.
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3/ the “flippening” when ETH mkt cap = BTC mkt cap occurs at ETH/BTC ratio of 0.0159. sizable positioning in ETH calls reflects mkt consensus of continued ETH outperformance
charts below show ETH put/call ratio is only 0.24, substantially lower than BTC’s at 0.53
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on the one hand, the ATM straddle in 26Apr is $6700 per unit, feels kind of expensive in USD move terms
on the other hand, you're paying 62v and it catches the halving, the Dubai conference and apparently... WW3?
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7/ which brings us to our second point, going short BTC is the easiest alternative for both tradfi and cryptonative investors. BTC linear derivatives trade around $30bn per day and still make up 44% of all open interest, despite the uptick in ETH speculation
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7/ this is just one trade, but CME is in fact gaining mkt share: CME is 22% of Deribit OI vs something like 5% a year ago
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4/ second metric is BTC dominance, measuring BTC’s % of aggregate crypto mkt cap. it's stayed at historical lows of 40% despite the bear mkt.
historically, BTC dominance rises in bear mkts, but we have yet to see it perform this cycle, likely because of ETH’s increasing share
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2/ first metric is the ETH/BTC ratio, ETH price divided by BTC price, which is 0.0733. this is still near multi-year highs of 0.0880 which we touched prior to the Fed-induced meltdown in risk assets in Dec 2021
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was a real pleasure meeting the 4th Jonas brother
@DavidMicley
at the film festival today. thanks
@okx
for sponsoring
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if this selloff continues, deribit going to start listing negative strikes
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