The Crazy End To 2020 Is Coming

Despite the impression that yesterday may have given you, we are currently in a historic period of low volatility for Bitcoin. I had to go back to 2016 to find a period of 30-day volatility for Bitcoin that was this stable. Conversely, we haven’t seen a period as volatile as March since 2013. Clearly, this is a time of extremes.

Now, the fabled runaway climb to 20k and beyond always seems as though it’s right around the corner, it may very well be the case that we see a “slow but steady” climb higher as the equity markets of the world don’t suffer a catastrophic implosion, but rather a “death by a million papercuts” that results in a growing chorus of those jumping ship for safer harbor as fiat currency increasingly resembles a balloon.

Interestingly, regardless of volatility and the larger markets, without hyperbole, I think we are moving into one of the most exciting times in crypto.

The odds are it’s going to be a crazy Q3/Q4 for the cryptocurrency and blockchain industry.

There will be a flurry of important crypto events in the next few months:

— Bitcoin beginning its “post-halving push”: It took the leading cryptocurrency approximately six months after the 2016 block reward halving to begin a steady uptrend higher.

— The likely launch of Ethereum 2.0’s first phase (“phase 0”): Despite some contention from a top Ethereum researcher, most expect the first phase of the blockchain’s notable upgrade to take place by the end of 2020. Analysts say that this launch will have an extremely strong effect on the market.

— Polkadot, an interoperability protocol, will be fully functional. It is very likely that it will be a true competitor to Ethereum’s DeFi / Web 3.0 throne, opening up many interesting possibilities.

— The Facebook-led Libra initiative (I know, I know) will be launching with its new structure, which was adapted to appeal to regulators.

— ZCash will see its own block reward halving, which may trigger an uptrend after a multi-year bear market.

— The value of coins locked in decentralized finance contracts could surpass $5 billion. Since the start of the year, this metric has trebled from around $700 million . . . to $2.5 billion a week ago . . . to $3.68 today!!

— The U.S. Election between Vice-President Biden and President Trump. It isn’t clear how exactly this will affect the cryptocurrency market, but Trump has been outspoken against Bitcoin in the past. No matter who wins, it will undoubtedly shake things up in the following months, especially when a potential transfer of power happens in January.

— Other events that could be noteworthy certainly include the launch of optimistic rollup technology on Ethereum, the launch of Bakkt’s digital asset application for consumers, and a potential public listing of Coinbase shares.

For now, let’s keep the focus on DeFi because this could get interesting quickly.

As you might know, two cycles ago we had the ICO boom. Then we had IEOs, security tokens, and exchange tokens. Now we’re seeing the same thing with DeFi governance tokens.

Indeed, there is bullish momentum behind the nascent market for decentralized finance. More than a billion dollars in total assets have been borrowed using Ethereum-based money market protocol Compound — which some view as the poster child of DeFi — fueled in part by the so-called “yield farming” craze. Yield farming is a catch-all term for generating yield by taking advantage of various non-custodial lending and exchange protocols. On Compound, for instance, users can earn COMP, its recently launched governance token, by lending and borrowing on its platform.

Meanwhile, centralized exchange FTX has seen its DeFi perpetual contract — represents a basket of various decentralized finance coins — appreciate by more than 50% since it launched a month ago. 

Traders are increasingly moving into new DeFi tokens while at the same time de-risking by trimming positions in large-caps like Bitcoin or Ether. Naturally, that is increasing demand for trading in certain tokens, such as COMP and BAL.

Let me explain a little more: Counterparties that would normally be focused on trading the majors have started to refocus on more frontier assets, where there are larger spreads, more volatility, and fewer market makers. Beyond just increased spot OTC volumes in these assets, we’re seeing borrow requests for market-making inventory, along with option hedge pricings from traders and investors.

By nearly every metric, Q2 proved to be DeFi’s breakout quarter. Total value locked surged to over $2 billion. DEXs saw record volumes with over $500 million in a single week as they continue to gain market share on centralized exchanges. Lending markets exploded on the back of Compound’s liquidity mining program which increased outstanding debt from ~$25 million at the start of the quarter to $800 million by the close. On top of all this activity, the native tokens of these protocols appreciated significantly as investors continue to bet on them capturing substantial earnings from protocols vying to be core parts of a decentralized financial future.

It’s clear that DeFi’s moment to shine is here — a lot of money is chasing yield with the broader low volatility, and they need to make money somewhere. Let’s expand on that. What’s always been the case is that DeFi is just a door, or platform, to enable decentralized finance solutions.

One such solution is options.

Traders are selectively adding risk in a range-bound market by selling options on the large-cap cryptos. The recent development of the derivatives ecosystem has made it easier for traders to profit from yield opportunities in options. It’s truly a new age of crypto trading.

There was a time when no one was selling ‘volatility’ in crypto. Implied vols, such as what we saw from the initial options products, were priced high to reflect the long-term existential uncertainties of the crypto asset class.

“Yeah, duh” said every crypto trader around the world at once . . . but recently, the game has changed. Now there are volatility sellers around every corner and supply is increasingly abundant.

What this means, for those unfamiliar with the power that real options products bring to the market, is that there is money to be made regardless if a crypto is going up, down, or sideways. Rather than trying to be directionally right about where the price of a crypto is going, you can use options to bet where the price is not going. You go from being the gambler to being the casino, and what’s better is that you can use options to generate yield — even in a quiet market.

So, wake up, pay attention, and get in front of these emerging trends as we finish out the year.

Regardless if things get increasingly crazy, or they get increasingly boring, there will be money to be made and opportunities that won’t come again.