Prepare for volatility

Stock markets are roaring like the '20s, Bitcoin and Ethereum seem unflappable and wow, would you look at that – Dogecoin hit twenty cents.

Tomorrow is Good Friday and public exchanges in the U.S. are closed. The S&P 500 had a great Wednesday – notching a new record high – and a decent, possibly historic Thursday is shaping up, as the index nears its best first-quarter close in half a decade.

Crypto traders seem cautious, or, rather, cautiously optimistic, with the impending quarterly expiry of billions of dollars' worth of BTC and ETH options contracts set to stoke price volatility, possibly in a bullish direction.

As of 7:18 a.m. (EST), total crypto assets approached the $2.8 trillion mark on a 1% gain in the past 24 hours, per CoinGecko.

Bitcoin touched $71K early yesterday and spent much of hump day gnawing on investors’ nerves, sinking to as low as $68,500. Wednesday night saw a nice bounce. But just earlier, in the darkness before the dawn, BTC seemed to be losing its grip on $70K.

Looking wider through a lens fortnightly, the largest crypto, since reaching an all-time high of about $73,700 (on March 14), has since shed 3%.

It was March 13 when Ethereum last tasted $4K. ETH in the past two weeks lost nearly 10%.

Turning back to Wall Street, "meme stocks" have returned to center stage. It's a term that connotes publicly traded companies that, regardless of fundamentals, explode in price and become difficult against which to bet, owing to a kind of buy-happy flash mob united in unchecked enthusiasm.

Exhibit A is Trump Media (DJT) which "has been going bananas this week," said the Wall Street Journal's Gunjan Banerji. "And when something achieves meme stock status, it takes on a life of its own."

Reddit spawned the meme stock genre with sub-community r/WallStreetBets galvanizing around GameStop, getting in while the self-perpetuating getting was good, which it was for GME (circa late January of 2021) until it wasn’t (about two weeks later).

Reddit itself has now become one of these so-called meme stocks after it shot up in its trading debut last Friday.

Yesterday, however, RDDT tumbled 12% and the stock is down in early-hours trading following the disclosures of insider selling by senior executives. Blood-in-water sniffing short sellers conceivably could pounce on the negative momentum.

Earlier this week, RDDT hit an intraday high near $75. The stock was about $54 as of early Thursday.

By end of day tomorrow (March 29) in Asia, Derbit will have settled some $15 billion worth of quarterly contracts tied to the price of Bitcoin and Ethereum.

Luuk Strijers, chief commercial officer at Derbit, the crypto sector's most enormous centralized options exchange, tells CoinDesk that many options are set to expire while enjoying in-the-money (ITM) status, meaning the trade has produced a profit and the contract can be exercised or sold, as opposed to contracts that sit out-of-money (OTM) having not met strike prices and thus can just quietly expire, worthless.

ITM contract holders cashing in could inject buy pressure into the underlying markets for BTC and ETH, stoking the kind of virtuous volatility that can be an all-in upward explosion. At the same time, dealer hedging activity could also spark violently jarring movements reminiscent of that last, frenetic, final stage of a brutally protracted game of tug-o'-war between family members who not-so-secretly hate one another.

Market makers seeking to maintain market neutrality (but also create bid/ask action, of which they get a taste) will tend to hold short options positions which need to be hedged, meaning a lot of buying (high) and selling (low), amplifying price undulations, and particularly exacerbating BTC volatility around the $70K level, providing for some "whippy, choppy” moves on either side, FRNT Financial's David Brickell told CoinDesk.

Meanwhile, we’re watching maximum pain points for BTC's and ETH's quarterly expiry, thresholds which sit at $50K and $2.6K, respectively. Max pain is options lingo (as well as a thematic touchstone in the “Hellraiser” horror film series) referencing that most profoundly uncomfortable level when option buyers stand to lose the most money.

Underwriters, i.e. trading firms, are said to try to inflict pain, pinning prices to max pain points, as CoinDesk has explained, noting a compelling historical trend. During the last bull market that peaked in November of 2021, BTC and ETH "consistently corrected lower in the direction of their respective max pain points only to resume the rally after the expiry," CoinDesk said.