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ETH at a discount? 1 Week Move in Stocks and Crypto were how extreme? Quantifying the move vs expectation.

 Over the last week the S&P 500 and Crypto Markets lost almost 6% and 30% respectively.  But how did this compare to the market expectations?

Bitcoin extreme / outlier move? 

By looking at the Implied Volatility Indexes for S&P 500 and Bitcoin we can see how much the market expected these assets to move:


%Change6/17/226/10/22Implied Vol (6/10/22)std1std (68%)2std (95%)3std (99.7%)
S&P 500-5.79%$3,674.84$3,900.8627.75%-1.513.8%7.7%11.5%
Bitcoin-29.25%$20,591.00$29,103.0079.80%-2.6511.0%22.1%33.1%


For the S&P 500, we can look at the VIX Index on 6/10/22 as 27.75%.  If used to measure the uncertainty for 1 week, this would correspond to 1 std move being 3.8%.  From 6/10/22 to 6/17/22 the S&P 500 moved down 5.8%, which corresponds to 1.5 standard deviation move.  Generally an outlier, or extreme move would be a 2 standard deviation move.  So even though there was a lot of hype about interest rate affecting the stock market, this past week's move was considered not an extreme situation (i.e. within 2 standard deviations).

However, as for Bitcoin, we can see the CVI Volatility Index on 6/10/22 was 79.8%.  This corresponds to an 11% for 1 standard deviation.  From 6/10/22 to 6/17/22 Bitcoin moved down 29.25%! which corresponds to a 2.65 standard deviation move.  This is would be considered an outlier move as it was bigger than 2 standard deviations than the market expected.  The big news and concerns for Bitcoin and Crypto is that Celsius lending platform halted transfers and resumptions as it may be insolvent and 3 Arrows Capital ( a Large Crypto Hedge Fund) may also be facing insolvency risk.  Both have been attributed to large losses from UST / LUNA.  Further, there is speculation that 3 Arrows Capital has a large loan on AAVE that will trigger a liquidation of a couple hundred million dollars worth of ETH if ETH gets near or below $1,000.  The market did get some confidence from Michael Saylor and Micro Strategy saying that they don't need to sell and won't have margin issues unless Bitcoin plunges down to $3,500.

Indicator / Discount to ETH? Staked ETH

One of the major tokens under pressure from all the uncertainty has been stETH (Staked ETH from Lido).  This is a token receipt for ETH that is being staked to support the protocol migration from Proof of Work to Proof of Stake.  The main difference with this token is that it enables users Liquidity but providing a tradable receipt.  Traditionally, staking ETH you won't be able to un-stake until after the migration is complete, but Lido offers a receipt token so people can have liquidity.  During this recent sell off in crypto, many holders of stETH are selling it to raise liquidity for margin calls.  As a result, stETH is trading at a discount to ETH.  (which will be redeemable after the migration to proof of work).  Below you can see the discount is near 6% and went almost as high as 9% (graph from http://www.coinmarketcap.com).

stETH discount to ETH

Takeaways:

It is impossible to know the future direction, but by understanding implied volatility, you can see what kinds of moves the market expects and also quantify how extreme a move is.   

stETH is trading to a discount to ETH.  This is probably a good indicator to watch to see if the crypto markets are under stress.  (discount meaning holders forced to sell).  Also, if you are comfortable with Lido smart contract risk, the discount could be an opportunity for people looking to acquire ETH for the long term.


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