After a brief flurry of speculation and activity around the halving of mining rewards in May, the crypto markets slipped into a 10 week slumber and were finally awakened when the office of the comptroller of the currency published a letter that opened the doors for traditional financial institutions to offer custody services for cryptocurrencies [https://www.occ.gov/topics/charters-and-licensing/interpretations-and-actions/2020/int1170.pdf]. The community correctly interpreted that this could be an especially important development in the lifecycle of crypto adoption, and BTC rallied more than 20% in the following days.

Since then, we have once again found a slumber. Day to day, fluctuations have largely followed macro and monetary policy marginal shifts, with BTC moves being driven as much by moves in USD and inflation expectations as much as anything else. It appears that the bulls who were waiting for the OCC letter have made their move, and markets are once again in a waiting game to see if and when we might see actual movement on retail customers access to crypto custody services through their regular financial institutions. If this does come to pass it would be an elimination of a major barrier that might be keeping many potential passive crypto investors out of the market. If those barriers do come down, simple supply and demand economics leads to the conclusion that prices should see quite a bit of buoyancy.

In BTC options, after the flurry of activity when the letter was published leading to spikes in implied volatility, term structure has once again settled in to a steep upward sloping curve, implying that option traders expect BTC to start moving again in the future, but not so much right now. Option traders are betting that the next spurt of volatility will rear its head in late September (perhaps after the next Fed meeting?), with more volatility coming towards the end of the year. Last month, they were exceptional at pricing in the timing of the OCC letter. We’ll have to wait and see if they get it right again.

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