Crypto Complex Left Reeling as Bitcoin’s VIX Blasts Past 110

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Bitcoin’s plunge below $40,000 is sending shock waves across the booming world of crypto derivatives.

Just as big S&P 500 selloffs rock options and futures markets, the speculative ecosystem underpinning the industry is getting whipsawed by the $500 billion rout in the biggest cryptocurrency -- a meltdown now deepening with disruptions at Binance and Coinbase, two major exchanges.

Crypto Complex Left Reeling as Bitcoin’s VIX Blasts Past 110

In options, the Bitcoin version of the VIX jumped to 112 on Tuesday, near the highest levels since February. For context, the S&P 500’s volatility measure has only reached as high as 90 in its entire three-decade history.

Futures traded by pros and retail speculators alike are now signaling fresh jitters over the crypto trajectory, driving divestments across exotic products tracking the $1.5 trillion market.

It all shows the deep financial footprint of the asset class after the multiyear growth in online exchanges offering leverage to gung-go day traders.

Crypto Complex Left Reeling as Bitcoin’s VIX Blasts Past 110

Bitcoin slid to around $34.327 as of 10:06 a.m. in New York after China’s central bank warned Tuesday against using virtual currencies for payment and Tesla Inc. founder Elon Musk appeared to temper his enthusiasm for the asset.

More than $600 billion was wiped out in the past week from some 7,000 tokens, according to CoinGecko. Bitcoin is still up more than 20% this year even with this month’s plunge.

“The extreme end of funding rates has definitely been tamed because a lot of people have cashed out,” said Oliver Chalk, who trades these derivatives at Proxima Capital, a crypto fund he co-founded.

In Sydney, Australia, Chalk has cashed out of most basis trades, a popular strategy that goes short on the futures and long the spot. In the crypto version of perpetual futures -- where no underlying asset is delivered and speculation is the main purpose -- the return is tied to the funding rate, which generally moves up and down depending on the sentiment.

When demand is strong, a bull would go long on the perpetual futures and trade against someone like Chalk. At a regular interval, either the contract would have converged with the spot rate, or Chalk would receive an interest for the premium.

But now, speculators are getting nervous about paying up for bullish bets, driving premiums to narrow or even turn into discounts in some cases.

Funding Rates

On the FTX exchange, the rate for Bitcoin has dropped to an average annualized 12% over the past 24 hours, compared with a 90-day average of 32%. For the once sizzling-hot Dogecoin, it dropped from 41% to negative 13%. On Binance, the discount on Ethereum contracts fell to a record-low 23%.

Similarly, on the CME exchange, the Bitcoin futures curve has flattened as traders dialed back optimism for future gains. Until recently, that curve had been reliably upward sloping -- known as contango -- as speculators used the instruments to express their bullish expectations.

Crypto Complex Left Reeling as Bitcoin’s VIX Blasts Past 110

Over in the options community, trading platform Deribit shows the largest outstanding bullish option expiring in a week was a call with a $80,000 strike. It last traded at an implied volatility of 177% -- a jump from roughly 130% just three days ago. With the spot now trading at less than half of that, that’s now, as the pros would say, decidedly out-of-the-money.

“Every year we see that the trading activities decline from May and only really increase again from September,” said Ruud Feltkamp, chief executive officer at Cryptohopper, which offers a trading bot for the market. “After such a bull market, it’s not strange to see people taking their profits.”

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