Trading Relative Crypto Volatility During the FTX Shock
Summary
This commentary examines the volatility shock following FTX's insolvency in November 2022. It reports sharp increases in BTC and ETH implied and realized volatility, and a particularly large implied volatility rise in Solana. After the initial repricing, implied volatility eased as some traders judged the immediate news flow to have passed and a lower than expected inflation reading supported risk assets. The proposed relative value position is to buy ETH volatility and sell BTC volatility, based on the BTC to ETH 30 day implied volatility ratio reaching the high end of its historical range and the view that ETH could respond more strongly to further disruption.
The article also discusses broader market structure and counterparty risk: exchange custody, institutional use of OTC desks, proof of reserves, and the authority of risk teams. It warns of potential contagion through exchanges, lenders, and trading firms. The volatility trade is a time specific opinion, not a backtested rule; the text provides no sizing, hedging details, or outcome data, and explicitly notes uncertainty around further market stress.
Key ideas
- The FTX insolvency coincided with a sharp rise in BTC, ETH, and Solana volatility measures.
- The commentary proposes long ETH volatility against short BTC volatility when their implied volatility relationship is elevated.
- OTC trading without prefunding is presented as one way institutions can limit exchange credit exposure.
- Proof of reserves should be reconciled with customer liabilities to provide a fuller view of exchange solvency.
- Independent risk teams can limit the chance that trading or counterparty exposures become existential.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.