Here’s how options traders would play the “very high volatility” that Binance founder Changpeng Zhao suggested will impact the crypto market over “the next few months”.
Volatility is a complex statistical measure commonly used by traders and investors. Those unfamiliar with it will likely attribute some sort of special ‘standing’ to analysts whenever the term is used. However, as shown in a recent comment by Binance exchange founder, Changpeng Zhao, most of the time people are clueless about what volatility means.
Expect very high volatility in #crypto over the next few months.
— CZ Binance (@cz_binance) October 21, 2021
This is not the first time that CZ has made an incorrect assumption on that topic. In May, CZ said that volatility was “not unique to crypto,” although multiple sources, including Cointelegraph, showed that excluding Tesla, no S&P 500 stock matched Bitcoin’s (BTC) 70% yearly volatility.
So what is volatility?
Realized (or historical) volatility measures how large daily price fluctuations are and higher volatility indicates that the price can drastically change over time in either direction.
This indicator might sound counterintuitive, but lower volatility periods represent a more significant risk of explosive moves. That is partially due to realized volatility being a backward-looking indicator. During quieter periods, traders tend to over-leverage, which then causes larger liquidations during sudden price moves.
The above data displays a 74% average 50-day volatility over the past two years. Historically, the indicator tends to accelerate as it moves above 80% but there is no guarantee that such a move will occur. Data from February and April 2017 present a counter-argument for this thesis.
Volatility does not differentiate bull and bear markets because it exclusively gauges absolute daily oscillations. Furthermore, by itself, a quiet volatility period is not an indicator of an upcoming dump.
What if CZ knows something we don’t?
Considering how well-connected the world’s largest crypto exchange founder is, there’s always a possibility that CZ might have some inside information but if a person was so sure about an upcoming event, the odds are they would likely know whether the impact is positive or negative. Once again, expecting “high volatility” for the “next couple of months” does not indicate someone has confidence in any direction.
Let’s assume that he was correct, and crypto volatility is about to breach the 100% yearly level. There’s an options strategy that fits this scenario and allows investors to profit from a strong move in either direction.
The reverse (short) iron butterfly is a limited risk, limited profit options trading strategy. It’s important to remember that options have a set expiry date; therefore, the price increase must happen during the defined period.
The prices above were taken on Oct. 25, with Bitcoin trading near $63,000. All options listed are for the Dec. 31 expiry, but this strategy can also be used using a different time frame.
The suggested bullish strategy consists of selling 1.23 BTC contracts of the $52,000 put options while simultaneously selling 0.92 call options with an $80,000 strike. To finalize the trade, one should buy 1.15 contracts of $64,000 call options and another 1.0 contracts of the $64,000 put options.
While this call option gives the buyer the right to acquire an asset, the contract seller gets a (potential) negative exposure. To fully protect from market oscillations, one needs to deposit 0.174 BTC (roughly $11,000), representing the investors’ maximum loss.
The risk to reward is sketchy, so the trader needs conviction
For this investor to profit, one needs Bitcoin price to be below $54,400 on Dec. 31, 2021 (down 14%) or above $75,500 (up 19%). The theoretical risk-reward is not good because the maximum payout is 0.056 BTC and the potential loss is over 3 times that amount.
Nevertheless, if a trader is certain that volatility is right around the corner, a 20% move from $63,000 in 66 days seems feasible. Traders should note that the investor can revert the operation ahead of the options expiry, preferably right after a strong Bitcoin price move. All one needs to do is buy back the 2 options that have been sold, and sell the other 2 that were previously bought.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.
CZ claims Binance didn’t really make Binance Smart Chain, Beijing to distribute $6.2 million in free digital yuan, and miners speak out about clean energy mining
This weekly roundup of news from Mainland China, Taiwan, and Hong Kong attempts to curate the industry’s most important news, including influential projects, changes in the regulatory landscape, and enterprise blockchain integrations.
Could green miners get a pass?
Last week’s column had a look at the recent crackdown on cryptocurrency miners as China heads towards a more carbon-neutral policy. This week, the Southwest province of China was humming a slightly different tune as the Sichuan Energy Regulatory Office organized a symposium on the topic. The province has a heavy mining concentration due to low cost energy generated from a developed hydroelectric power system. The symposium failed to reach a resolution, leading to speculation that the green energy of the province will lead to much more positive regulation.
Zhang Nangeng, CEO of mining-machine manufacturer Canaan, added to this speculation by calling for China to make allowances for green-energy powered miners. “For-profit miners prefer regions with low electricity prices that indicate oversupply, and likely energy waste. Bitcoin miners also help create jobs in impoverished regions and contribute to fiscal coffers,” pointed out the CEO. It seems unlikely that China will continue to allow miners to abuse coal-powered electricity in regions like Inner Mongolia, but for Sichuan there is definitely an argument to be made in favor of the lucrative mining industry.
Uniswap rug pulls on state-run TV
On June 2, national television channel CCTV-13 reported on virtual currency fraud in their News Room segment. In the report, they introduced how a virtual currency TRTC was listed on Uniswap before having all the liquidity removed. Blockchain smart contract auditor SlowMist was also featured as they demonstrated how the fraudulent activity was conducted. In the TRTC case, 59 ETH were removed from the pools, worth about $100,000. CCTV-13 concluded by warning about the risks of financial fraud on cryptocurrency platforms such as Uniswap. On Twitter, Uniswap founder Hayden Adams mistakenly tweeted about the segment, confusing the video clip as a positive report. Apparently Adams hasn’t spent as much time practicing his mandarin as other early Ethereum pioneers Vitalik Buterin and Gavin Wood, who both have a decent grasp of the language.
BS and C?
In a Chinese-language interview on May 29, Binance founder CZ distanced himself further from Binance Smart Chain by claiming that it has no control over the chain and that it was not responsible for the creation of it. He coyly suggested that BSC has been a community project and that he rarely speaks to the team behind it. Binance and competing Chinese exchanges may be rethinking their positioning after a series of hacks and exploits have haunted the various ‘smart chains’ that offer further utility to exchange tokens and their users.
Blockchain, not Bitcoin
Despite the increasingly harsh regulatory environment, China hasn’t backed down on its pro-technology stance. On May 31, new blockchain technician standards were released from the Ministry of Human Resources and Social Security and the Ministry of Industry and Information Technology. The standards detailed what skills and core competencies are required to work in the industry.
$6.2 million CBDC airdrop
Beijing is launching another digital yuan lottery as it continues to push the release of the central bank digital currency. The Beijing Local Financial Supervision and Administration announced on June 2 that the government will distribute the free currency to citizens who apply before June 7. This comes in the same week that former People’s Bank of China director Yao Qian stated that the digital yuan was not to be used as a surveillance tool. He claimed the technology was initially developed to counter the private sector’s control of the payment sector. The western world might remain skeptical on this point but the need to balance the private sector is certainly plausible, given the national dominance of Alipay and WeChat pay.
Binance has reported a new record of more than $80 billion in daily volume across its spot and derivatives platforms.
Changpeng Zhao, the chief executive of Binance, the world’s largest crypto exchange by trade volume, reported a record of $80 billion in 24-hour trade activity on Jan. 4.
On Twitter, CZ compared the recent activity to the volume posted during the last record-breaking bull cycle, noting that the past day of trade equates to four-time the volume processed on the exchange from Nov. 15, 2017 to Dec. 15, 2017.
To put this in perspective, from Nov 15, 2017 to Dec 15, 2017, the month leading up to the ATH in 2017, @Binance did $20 billion in trading volume in 1 month. And we were the largest with those volumes back then.
— CZ Binance (@cz_binance) January 4, 2021
In the 24 hours preceding CZ’s tweet, Binance’s spot volume exceeded $23.6 billion, while its derivatives represented nearly $57 billion in trade.
Despite the milestone, CZ acknowledged the platform had experienced disruptions amid the record volume, stating:
“We saw some scaling issues today. We probably will see more issues as we continue to grow. We aren’t perfect, but we will fix them as quickly as we can.”
However, in addition to the unprecedented trade activity, Jan. 4 also saw Binance process a record $190 million in liquidations over 10 minutes as BTC quickly crashed below $30,000.
On the same day, Sam Bankman-Fried, the CEO and founder of crypto derivatives exchange FTX, reported that his exchange had processed more than $10 billion of the $180 billion in volume produced by the sector’s five-largest exchanges that day.
— SBF (@SBF_Alameda) January 4, 2021
Binance’s record volume comes as Bitcoin consolidates above $30,000 after gaining more than 50% over its previous all-time high, and Ethereum has reclaimed four-figure prices for the first time since January 2018.
The spoils of the rally appear to be flowing into the DeFi sector, with the USD total value locked, or TVL, on decentralized finance protocols smashing records, from $12.5 billion at the start of December to currently sit at nearly $18 billion.
However the number of BTC locked in DeFi has fallen from an all-time high of 65,000 as of late October to less than 25,000 today, while locked ETH has fallen from almost nine million as of mid-November to 6.8 million today.