The Options Markets Odyssey, Token Unlocks, and Shifting Terrain

• Crypto traders experienced $1 billion in liquidations during a rapid 24-hour sell-off
• Coinbase obtained a stake in stablecoin operator Circle, expanding USDC to 6 new blockchains
• EDX Markets chose Anchorage as its custody provider for crypto exchange

The options odyssey: liquidation lore and volatility's encore

Despite the crypto markets experiencing a sharp decline this week, the overall market capitalization managed to stay above the $1 trillion mark. However, bitcoin's dominance fell below 49%. Among the majors, bitcoin saw a 7.9% drop in value compared to the previous week, while ether outperformed bitcoin with a weekly decline of 7%. On Friday, during the early hours of the morning in Asia, the crypto markets saw a sharp drop. Bitcoin's value plummeted to as low as $25,000, leading to a staggering $1 billion in losses caused by liquidations across crypto markets within a 24-hour span. According to data from Coinanalyze, this marked the highest volume of bitcoin liquidations in a single day since June 2022, a period when bitcoin had nosedived to $17,000.

Crypto Twitter noted that this event marked the second-largest BTC liquidation event in the history of Deribit. Speculation arose that the platform's liquidation mechanism involved shorting perpetual contracts to delta hedge extensive liquidated short volatility positions. A post from QCP highlighted that the sudden drop was primarily linked to extensive liquidations of gamma-related perpetual contracts on prominent option exchanges, specifically Deribit and OKX. Surprisingly, these liquidations accounted for a significant 50% of the overall liquidation volume during this market crash, which sharply contrasted with their relatively modest open interest share of 17%.

In a Twitter thread, Deribit shared their insights in an interesting take on the options liquidations. Over the last few months, a large call seller (both in BTC and ETH) was observed and it is speculated that these are either a pure delta-neutral volatility play, or selling covered calls against spot positions, particularly relevant when implied volatility surpasses realized volatility. Traders accumulating spot positions in anticipation of a positive ETF decision could enhance yield by selling short-dated out-of-the-money calls. Amidst lack of any trends and low funding rates, retail traders found yield through the short gamma strategy, capitalizing on time decay. The dynamics between volatility sellers and limited volatility buyers created an imbalance, compressing volatility into a vol coil, and this coil's release triggered a significant market reaction. He also highlighted that the deep dive into liquidation shows that the liquidated option positions were not puts or at the money but synthetic upside positions and thus IV reacted higher but did not explode. The pop in vol was not dramatic especially compared to previous large spot moves and heavy delta one liquidation events.

Tokens on the move: unlocks and the shifting landscape of cryptocurrency

Among the prominent large cap Layer 1 (L1) tokens, AVAX experienced a 9.1% decline in its value week on week. The Avalanche blockchain is set to execute a token unlock on Saturday, August 26, releasing 9.54 million AVAX tokens, valued at around $100 million at the time of writing. This constitutes 2.77% of the total circulating supply. Token unlocks are gradual releases of previously frozen coins to prevent substantial liquidations by early investors or project team members. Over the upcoming year, there's an anticipated 25% increase in the token supply, amounting to 84.2 million tokens, based on information from TokenUnlocks. The unlock trend continues this week with the liquid staking protocol Lido (LDO) and Yield Guild Games DAO (YGG) tokens also scheduled for unlocks. Lido's governance token will unlock 8.5 million LDO tokens on August 26, which equals about 0.97% of the total supply. All of these tokens will be distributed to investors who collectively hold more than 300 million tokens, as reported by TokenUnlocks. Additionally, YGG plans to release 12.2 million YGG tokens (equivalent to $2.87 million) on Sunday, accounting for 6.6% of the cryptocurrency circulating supply. Currently, approximately 30% of the token's supply has already been unlocked.

Despite the markets gradually recuperating from a notable downturn this week, there have been captivating developments in the cryptocurrency industry. Coinbase disclosed its acquisition of a minority stake in Circle, a stablecoin operator. Notably, 6 additional blockchains are set to integrate with the USDC stablecoin, bringing the total to 15. Institutional crypto exchange EDX Markets has chosen Anchorage Digital to provide custody solutions for its forthcoming clearinghouse business, as outlined in a company statement. Securitize, an asset tokenization firm with registered broker-dealer status, revealed its intention to purchase Onramp Invest, a digital asset wealth platform. In another strategic move, crypto market maker B2C2 has expanded its presence in Europe through the acquisition of Woorton, a French market maker, which includes gaining access to a license in France.

Macro pulse

Among TradFi assets, US equities rose 0.7% (vs. previous week), led by gains in big tech names and an expectation of the Fed pausing rate hikes due to lackluster economic reports. Oil futures edged 0.6% lower week on week on the concerns over sluggish global demand. The US Dollar index softened posting decline of 10 bps and 10-year US treasury yields slipped 6 bps while the Gold & Silver index rallied 3% week on week.

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