Thread
1/ Seeing various takes on the collapse of implied vols in BTC and ETH and talks of "gamma squeezes" that might mirror what we saw in single name equities in 2021 - however think there are diff dynamics in play in crypto 
2/ The lack of spot movement and the presence of Defi Opts Vaults (DOV's) in my view are equal contributors for the selloff in vols
3/ With the absence of anticipated events, implieds tend to track realized, which has bled lower over the last 6 months 
4/ Additionally the introduction of automated yield generation strategies through DOVs have suppressed the front end of the curve via supply of wingy 1wk options (~10-15 delta)
5/ Mechanically in the absence of increased demand this flow lowers implied vols and gives market makers (often delta neutral traders) topside gamma - in a rally, to stay flat they would sell spot
6/ If market makers are stuffed with topside options without an offsetting buying flow or catalyst/trigger to move spot, this can become a reflexive spiral on both realized and implied vols (and introduce negative spot vol correlation, bc the gamma is concentrated to the upside)
7/ This dynamic is significantly different than the retail call buying that lead to the gamma squeeze mania for GME in 2021, TSLA in 2020 etc - the short upside gamma forced the hand of delta neutral market makers to buy spot as it went up, accelerating the reflexive upside there
8/ Put simply:
a) defi, the flow is generally structural call selling to market makers (market makers are getting longer gamma)
b) stocks the flow was call buying in illiquid single names (market makers are getting shorter gamma)
a) defi, the flow is generally structural call selling to market makers (market makers are getting longer gamma)
b) stocks the flow was call buying in illiquid single names (market makers are getting shorter gamma)
9/ Another factor at play is the relative leverage in each flow - with DOV, participants fully collateralize their call selling with the underlying (unlevered), whereas in the stock examples, retail was able to get tremendous leverage on the underlying through call option premium
10/ This might explain the violent upswings in some of the names that made mainstream news stories last year: GME, AMC, NOK - in various cases the amount of delta market makers needed to buy back on an upmove was much greater than the daily avg volume of the stock
11/ So wrapping up, what will it take for us to break this down only vol spiral and see movement in BTC and ETH? Imo its one of two things: 1) the first one won't win any popularity points but a big nuke or 2) large spot buying into large cap crypto
12/ In the near term this has been facing some headwinds from the tighter monetary environment and from capital inflow/rotation in the crypto space. Participants both on the retail and institutional size don't seem to be that excited about buying BTC and ETH at such high vals
13/ Instead, investors appear to be chasing rotations with higher upside such as NEAR, FTM, and ATOM (note that last years darlings SOLUNAVAX have also had a sluggish start to the year) and raising 9 figure VC funds to deploy into early stage web3 opps
14/ Until this dynamic changes and the mkt sees a reason to rotate to BTC and ETH, suppressed upside volatility in crypto majors could stick around
