Key metrics: (22Sep 4pm HK -> 6Oct 4pm HK)

· BTC/USD +9.2% ($113,000 -> $123,450), ETH/USD +8.6% ($4,180-> $4,540)

A very sharp and fast move back to test and make new highs in the past week, after probing down to $108k on the month/quarter end rebalances the week prior. Technically, the (extended?) flat correction we have been looking for appears to have begun playing out. Given the price action is broadly consistent with our long term levels, we continue to think a flat correction is the most probable dynamic here and with that we think a high could be made around $129–130k; beyond that we will need to revisit this move as it becomes increasingly likely to be part of a progressive move. We expect good support on pull-backs initially to $120–118k, but any moves below that could signify that we are moving into our eventual expected more aggressive Wave C correction lower (below $100k)

Market Themes

It’s been an eventful two weeks for crypto as the highly anticipated month/quarter-end rebalancing flows pushed BTC to lows around $108k and ETH briefly below $3.9k, while SOL had a vicious retrace after failing at $250 and printing down to $190. However this all quickly reversed as soon as we entered ‘Uptober’, with a quick rally up to the previous highs of $117.8–118k (which held after Jackson Hole and FOMC) triggered some short stop losses, and eventuated in a test and break of ATH for BTC, briefly above $125k. Much of this is attributed to a ‘catch-up’ play with Gold pushing fresh highs on a daily basis given the US government shutdown and the accelerating fears of sticky inflation in a world where most G10 central banks are cutting rates. Equities also shook off some heaviness around the month-end rebalance with lots of positivity continuing around AI and data centre investments

BTC$ ATM implied vols

Despite the large range of the moves in the past two weeks, traversing $113k->$108k->$125k, realised volatility on a high frequency basis has been rather subdued in the 25–35 range. Ultimately we haven’t seen any discontinuous gap moves as spot liquidity remains ample in the broad range for now, while the market seems to trade long gamma locally with an increase in supply of gamma from overlay/treasury strategies seen in recent weeks, again helping to contain moves locally

The lacklustre realised vol offset the usual risk premium reflation we would expect to see on higher spot/range break, resulting in a broadly static implied vol curve for expiries 1 month and out. Front-end implieds have rallied significantly given the unexpected moves over the weekend, though with spot finding a level for now around $123–124k and realised still remaining subdued, we could expect a correction lower in those expiries quickly. With the US government shutdown, variance for NFP and CPI data remains ‘floating’ given the uncertainty around their release date, and given the inversion of the curve we prefer owing 31Oct expiries to cover those data points and FOMC

BTC$ Skew/Convexity

Skew prices retraced from their deep pricing for puts over the past 2 weeks, as fears of a plunge below $100k quickly abated when spot buying flows resumed once the month/quarter end rebalances were done. While realised volatility has been muted on the topside, the market is seeing some demand for calls and also remains cognisant of a continuation of momentum on the topside to ‘price discovery’ levels that could result in more volatility. Against that, it’s clear the ‘riskier’ side for this asset is on the downside and with funding rates picking up/leverage beginning to build, the market is also wary of the downside flush and for this reason we haven’t seen skew prices push into positive territory yet (outside of very short dated expiries)

Convexity prices moved lower towards the end of last week as the market was supplied with some wings via call-spread demand. Also the market is perhaps pre-positioning for some fresh overlay topside supply at these levels of spot and thus keeping a lid on implied levels for topside. Against that some opportunistic supply of wing downside on higher spot has also provided further supply. One thing worth noting is that a clean break either side from here of $115–130k would likely see a sharp reprice in levels of skew (i.e. bid for calls above $130k vs bid deeply for puts below $115k), so there is some risky gamma dynamics that offer value to the flies from here

Good luck for the week ahead!