Market Wrap: Cryptos Mixed as Volatility Fades, Traders Expect Weak Recovery

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Bitcoin (BTC) was roughly flat on Monday, while some alternative cryptos (altcoins) underperformed, indicating a lower appetite for risk among traders.

LUNA, Terra's governance token, declined by 18% over the past 24 hours, compared with a 6% drop in GALA and a 5% decline in AVAX and DOT over the same period. Typically, alts decline more than bitcoin in down markets because of their higher risk profile.

Still, the uptick in trading volume during last week's sell-off coupled with fading volatility could point to a brief upswing in crypto prices.

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Technical indicators suggests a weak price recovery for bitcoin, which requires another weekly close above $30,000 to encourage buying activity. Still, the recovery could fade at around $33,000-$35,000 because of negative momentum signals on the charts.

Meanwhile, Terraform Labs CEO Do Kwon released a “revival plan” to save the Terra network after last week’s meltdown. Kwon proposed forking Terra into a new chain without terraUSD (UST). The plan could go into effect if token holders approve it. Read more here.

During last week's UST de-peg, "other major stablecoins such as USDC, BUSD and DAI experienced a 1% to 2% premium as investors moved toward assets they perceived were less at risk of contagion," Glassnode wrote in a blog post. That suggests, for now, that risks surrounding UST have been contained.

Bitcoin, ether and gold prices are taken at approximately 4pm New York time. Bitcoin is the CoinDesk Bitcoin Price Index (XBX); Ether is the CoinDesk Ether Price Index (ETX); Gold is the COMEX spot price. Information about CoinDesk Indices can be found at coindesk.com/indices.

Uptick in trading activity

Bitcoin's average trading volume last week rose toward its highest level since January. That happened during a time of extreme bearish sentiment.

Trading volume declined over the past weekend, but remains elevated – almost twice as high the average volume levels recorded in April, according to Arcane Research.

Still, in the futures market, bitcoin's open interest, or the total number of derivatives contracts outstanding on the Chicago Mercantile Exchange, continues to decline from its recent peak on March 28. That suggests the recent sell-off emanated from trading activity in the spot market rather than from leveraged traders in the futures market, although liquidations have accelerated the downward price moves.

Bitcoin's implied volatility also remains elevated following last week's sell-off. Further, intraday volatility reached its highest level since May of last year, according to Arcane Research.

"The key contributor to surging intraday volatility tends to be massive destabilizing effects in derivatives with leveraged positions unwinding, causing knock-off effects in all associated markets," Arcane wrote.

Typically, volatility spikes are short-lived, especially if price declines stabilize. Some traders remain cautious because of the weak recovery in crypto and equity prices following last week's sell-off.

QCP Capital, a Singapore-based crypto trading firm, stated that it intends to keep long volatility positions open in anticipation of choppy markets, according to a recent Telegram announcement. The firm is watching for news on the fallout from the Terra stablecoin debacle, which could be a source of additional volatility in the future.

Still, others are looking for opportunities to fade the spike in volatility. "In the short term, spot prices have likely bottomed out while option volatility likely peaked," Greg Magadini, CEO of Genesis Volatility, wrote in a blog post on Sunday.

"Should prices find stability and bounce violently higher, fading the skew is a prime volatility trade," Magadini wrote, referring to the anticipated decline in the relative volatility of put options versus call options.

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