There's been a structural change in crypto that makes it more like the old and boring equities market. But a shiny new fascination has taken hold in fast markets — NFTs.
In my very first comment for this newsletter, way back in September (that’s 137 years ago in crypto time), I noted how different the pricing of crypto options was compared to anything I’d seen in equities.
Call options on both BTC and ETH were more expensive than put options, the opposite of what I’d come to expect from TradFi.
In equities, people pay up for puts in order to hedge their downside.
In crypto, by contrast, people were paying up for calls in order to not miss out on the upside.
Crypto was a wonderful, wacky world where FOMO reigned supreme.
Seven months after my arrival from TradFi, that is no longer entirely the case.
(Sorry, everyone. I’d take one for the team and go back if I thought it would help.)
That sounds like a qualitative judgment, but it’s perfectly quantifiable with options pricing.
As seen in data provided by Genesis Volatility, the shape of the options curve — the “smile” — has changed dramatically.
Here’s the BTC options curve from September of last year:
That long, upward-sloping tail to the right is a reflection of the huge premiums people were paying for upside exposure to bitcoin: 115% implied vol for the right to buy bitcoin up 100%!
And here’s the BTC options curve today:
The market is no longer worried about missing a giant rally in bitcoin.
In fact, upside exposure now costs much less than downside protection.
(i.e., the right-hand side of the chart is now lower than the left-hand side.)
That’s the options market’s way of telling you that the upstart crypto market has become a lot more like the boring, old equities market.
There are a number of reasons for this: Realized volatility has been lower, there are more professional market makers selling implied volatility to retail buyers, and options vaults are pushing short-dated volatility lower.
Could we ever get back to the wildly upward-sloping smile?
I’m guessing not.
I suspect this is a structural change — Crypto is just a little less special than it used to be.
To the Moon
It’s still plenty special, however, as evidenced by the recent trading in Moonbirds.
Moonbirds is an NFT collection that launched this weekend at a mint price of 2.5 ETH.
Just a few hours after launch, they were selling for a floor price of over 25 ETH.
25 ETH!
That’s a 1,000% gain in less than a day. Which, mathematically, works out to an annualized return of approximately infinity.
You won’t find anything like that on offer in TradFi.
In equities, there is occasionally an IPO that opens up 100%. (A measly double).
But those are only available to institutional investors paying millions in commission to bulge bracket investment banks.
As retail, you have a zero percent chance of getting an allocation to one of those — they won’t even let you place an order.
Everyone was welcome to place an order for Moonbirds, however.
And you had a randomized chance of about 9% of being offered a spot to mint.
That’s a 9% chance of 10x upside. Not bad!
The barrier to entry here is just being aware that it’s happening.
And being open-minded to the possibility that a pretty ugly jpeg of an owl could be worth $75,000 to someone.
Why that might be the case is a story for another day.
But the point is that crypto remains a world of right-tail risks — the opposite of traditional finance.
Bitcoin and ether are acting more like TradFi equities.
But crypto is still a wacky and wonderful place for investors. (Okay, fine: degens.)
Left-tail risks abound in crypto, of course; you may occasionally get rugged.
Or lose the seed phrase to a wallet.
Or, in a moment of madness, buy something with 8,000% APY that is of course going to zero.
Ok, maybe the rare 1/1 Palm Beach Permie is out of budget for many. But even if you don't snag a Permies VIP NFT, you can enjoy sunny Palm Beach with the rest of Web3.
Get tickets to Permissionless before they're gone.
