Crypto Market Research

The uncertainty associated with the upcoming U.S. election remains evident for the term structures of both BTC’s and ETH’s implied volatility. While implied volatility levels have been trending downward, realized volatility has been on the rise in early October, driven by recent short-lived fluctuations in spot prices. The downward trend in implied volatility levels contrasts with the buildup of positioning that we typically observe ahead of known event risks, as we saw ahead of the release of BTC Spot ETFs in January 2024.

With less than 30 days left until the US Presidential election, the term structure of ATM implied volatility is clearly showing the same dislocation that we have observed for several months. Implied volatility levels for 30-day-tenor options have moved further up, now trading similar levels to longer-dated options. Despite the relative kink, outright volatility levels have dipped in the past week for both majors. Spot price downside volatility in early October has been reflected in derivatives sentiment, with volatility smiles skewing towards puts at pre-election expiries. While levels have since recovered for BTC OTM options, showing a preference overall for OTM calls, ETH volatility smiles still exhibit a premium assigned to puts at short tenors.

The U.S. presidential election continues to present a volatility premium for expirations later than the Nov 5, 2024 date. While longer-tenor volatility smiles have presented a consistent skew toward OTM calls, short-tenor options have recently followed suit. Derivatives markets have expressed that the pullback in spot prices at the end of September hasn’t had a significantly bearish impact on sentiment.

Despite a general slow down in spot price action for both majors, their derivatives markets have shown confirmation of what we first noticed last week: clear indications of a return to short-term positive sentiment and bullish trading activity. The recent skew towards OTM calls has consolidated, and we now observe a call-skew for smiles across all tenors. Perpetual swap funding rates have been strongly oscillating, but have registered high positive values throughout the week. At the same time, the front end of the term structure for ATM options’ volatility has increased substantially near to the 30-day tenor, as the US election moves closer along the term structure: this is further evidence that the date is influencing market positioning.

Following the Federal Reserve’s 50 bps rate cut on Sep 18, 2024, spot prices for both BTC and ETH have reacted positively. Derivatives markets are exhibiting various indications of positive sentiment: both futures and perpetual swap open interest have maintained high levels, and funding rates have traded positively overall for most tokens. BTC’s open interest for calls has slowly been on the rise, and the volatility smile has grown steadily toward calls for both BTC and ETH. While implied volatility levels for ATM short-dated options have oscillated downward, we see a growing positive outlook overall in the derivatives market for the short term.

Following the cut in the Fed funds interest rate on September 18, 2024 we have seen an increase in spot prices for both major coins and an overall positive sentiment in the derivatives markets. The futures implied yields term structure was largely inverted over the last week, with yields showing high levels for the short term. However, the curve has now disinverted, having returned to similar levels as of last week. Perp swaps funding rates have fully recovered for both tokens, after a long period of stagnant negative rates. While ATM implied volatility levels have been on a slight decline for both BTC and ETH options, skews have been on the rise across all tenors, indicating a general increase in preference towards calls, adding to the evidence of a growing bullish sentiment in derivatives markets after the interest rate cut.

Our report highlights the changing dynamics of Bitcoin in the investment landscape. Since the launch of BTC Spot ETFs in January 2024, Bitcoin has increasingly correlated with risk-on assets, particularly the S&P 500. This development suggests a growing interest from institutional investors, positioning BTC as a significant macro asset. Historically, cryptocurrencies have experienced volatility, but this newfound connection to traditional equities indicates that BTC is becoming a preferred option for investors seeking exposure to broader market trends. As Bitcoin's role evolves, it is increasingly viewed as a potential hedge against inflation and economic uncertainty, similar to gold. This shift in perception underscores the necessity for investors to reassess their strategies, and to consider Bitcoin's potential as both a traditional asset and an emerging digital currency.

The spot recovery we observed last week, for both tokens, has slowed down over the past days, with prices remaining within range-bound action. ETH’s futures yields have dropped for short tenors: while we can observe a flat term-structure for BTC’s yields similar to last week, ETH’s now results in a steep structure. Implied volatility levels have overall dropped similarly for both tokens, with ETH’s options remaining at a consistent volatility premium than BTC’s across all tenors. However, volatility levels for short tenors appear to be on the rise once again. Despite oscillation in implied volatility skew, sentiment has moved sideways, not expressing changes from last week across all tenors.

Derivatives markets continue to look forward to the US Election, pricing volatility for expiries later than the November 5 date at a significant premium to shorter-dated optionality. This is in contrast to the short term events that dominate the calendar in September, with the Federal Reserve set to join the growing global easing of interest rates after CPI figures in August confirmed that inflation is indeed falling in the US. Attention now turns to the labour market, which poses the stronger risk to the Fed’s dual mandate and may dictate the pace of their impending cutting cycle.

After a 12-day period of spot decline since August 26, prices for both major tokens have finally started to recover over the past few days. This rise has positively affected short tenor futures yields, which have risen significantly in the past week, resulting in a flattened term structure. Implied volatility levels for BTC and ETH short-tenor options have been rising dramatically since the beginning of the month, while short-term skews have dropped and rebounded, now being at similar levels as of last week. As a result, ETH options are consistently skewed towards puts for short-tenor options, whereas short-term sentiment for BTC is neutral again and not expressing such a strong preference.

After the recent drop in BTC and ETH spot prices over the last week, we can observe an overall increase in implied volatility levels across the term structure for both major tokens. The front end of the structure has been particularly affected. For example, ETH 7-day option volatility has risen to the same levels as long-tenor options. Derivative markets remain skewed toward OTM puts for both majors for short term options, showing a significant strengthening in a short-term bearish outlook as spot fails to pick up. The negative sentiment for cryptocurrencies continues with open interest for BTC options showing higher levels for puts, and total open interest for perp swaps on the decline following the most recent sell-off.

Despite volatility levels having largely fluctuated for short-tenor ATM options, from the term structure we can once again observe that, as the US election approaches, volatility for options expiring after the election date is rising. We can additionally observe that skew for short-tenor options has been evolving positively in the past few days, with skew levels slightly rising similarly to what happened in mid-August, indicating a more neutral outlook despite the recent spot volatility. Concurrently, long-tenor options have consistently been pricing in higher volatility levels across the term structure, showing a stronger preference towards OTM calls.

Derivatives markets indicate a similar positioning after the Jackson Hole Economic Symposium to that which we saw last week. Federal Reserve Chair Jerome Powell’s confirmation of the beginning of a rate cutting cycle in the Fed’s September meeting did little to change markets’ expectations on the pace of rate cuts, as it had already priced for 100 bps of cuts across the three remaining meetings of the year. Instead, it was the spot price sell-off on August 28 that moved markets -— with indications of a spate of perpetual swap liquidations in majors, and a small but noticeable spike in short-tenor volatility levels. The term structure of volatility holds a similar shape to last week’s, pricing in a volatility premium for expirations covering the upcoming U.S. presidential election on Nov 5, 2024.

Another week of low volatility, sideways price action has none-the-less provided interetsing trade activity in derivatives. The additional bearishness afforded to ETH over BTC has continued, with a more negative funding rate over the past month, at-the-money volatility premium, and stronger skews towards OTM puts, especially at short-dated expiries. Despite this, the volatility markets of both majors indicate a growing premium priced in for the November 5, 2024 U.S. Presidential election date, with an increased bullishness for expiries after the event expressed by a stronger skew towards OTM calls.

Since recovering from the selloff in the first week of August, spot prices have largely moved sideways. This period of relative calmness has opened up a space for a divergence in sentiment between BTC and ETH, with metrics across derivatives markets indicating a stronger bearishness assigned to the latter in the short term. ETH futures-implied yields trade significantly lower, perpetual swap funding rates have moved intermittently negative, and options on ETH trade with a premium to BTC’s implied volatility across the term structure, with short-tenor OTM puts afforded an implied volatility premium over OTM calls.

The past week of spot price action has been relatively calm in comparison to the two that preceded it. Without an obvious catalyst to drive spot prices back to the highs lost in last week’s selloff, the recovery has floundered somewhat. Derivatives markets reflect the elevated uncertainty, with volatility levels trading at their July highs despite a resolution to the inverted shape of their term structure. Sentiment remains more bearish for ETH, which prices in a higher level of implied vol, lower funding rates, and stronger skew towards OTM puts.

Following the market selloff and the surge in volatility we have witnessed last week, derivatives market seem to have stabilized. Volatility has dropped for both BTC and ETH at the front end of the term structure, and funding rates returned positive for BTC while slowly rising for ETH. The period of market distress we have observed after the sudden risk-off event appears to have abated for now. However, skew has confirmed the trend we highlighted last week, as longer-dated volatility smiles remain skewed towards OTM calls and shorter tenors show a preference for OTM puts. While sentiment in the long-run still remains bullish, markets still show caution in the short term.

In the 15 years since its inception, BTC’s price action has displayed an uncanny pattern of repetition. Looking at BTC’s historical price data, we can subdivide each of the three historical cycles of strikingly similar price action for BTC: recovery, boom and bust. The most recent bull run, which started in late 2022, is currently 624 days in. Compared to historical averages, this cycle could last another 350 days, though returns in each cycle have diminished over time. Lower disposable capital among retail traders (as indicated by the lower level of personal savings, following a period of high and persistent inflation) has thus far been expressed in the lack of the exuberance that we’ve come to expect in bull cycles. The changing intra-asset correlation structure between crypto and meme coins suggests that a different type of investor may be behind the most recent rally in prices: institutions. The renewed co-movement with equities coincides with the launch of BTC Spot ETFs in early January 2024, as well as the unlocking of a new pool of demand for crypto.

A week of bullish narratives for crypto at the BTC Nashville conference and the launch of ETH Spot ETFs has been followed by a starkly contrasting sell-off. Crypto has once again proved its position as a 24-hour macro indicator, as it reacted strongly to the weaker-than-expected nonfarm payroll report on Aug 2, 2024. Alongside other risky assets, the news saw a sharp sell-off across crypto assets. However, it hasn’t yet seen the same wipeout of leveraged positioning or elevated volatility levels in the way that we’ve come to expect from double-digit crashes.

One of the largest global market selloffs since the COVID pandemic took its toll on crypto-spot prices, resulting in double-digit selloffs that were harder felt by ETH and alts than BTC. The selloff saw funding rates spike negative as accumualted long positions were likely liquidated, and the volatility term structure inverted as traders rushed to cover exposure to further downside moves in the short term. However, volatility levels did not spike above their year-to-date highs for either major, and longer-dated volatility smiles remained steadfastly skewed towards OTM calls. This indicates that while this was strong move in the short term, traders are not yet concerned about long-term performance.

Using SOFA structured products to express market views offered several advantages over taking the same exposure on offchain or centralised alternatives. Trading options positions onchain removes counterparty risk as settlement is ensured by the verifiable logic of a smart contract and full collateralisation. Trading on SOFA offers exposure to the RCH token, which is airdropped to users on a periodic schedule. These tokens are awarded to users according to the proportion of volume that they trade in each recording period. Onchain positions in SOFA structured products are tokenised using leverage the ERC-1155 token standard. This allows for custom position parameters to be stored on the token itself, allowing for a more accurate valuation of the position so that it can more easily be composed and used as collateral in other trades.

The dramatic events of last weekend’s assassination attempt on Donald Trump have coincided with a strong recovery in crypto spot and, consequently, derivatives markets. Traders appear to express the “Trump Trade” just one week after spot prices crashed as the Republican candidate saw the probability of his re-election soar. Futures: Yields have recovered their pre–sell-off levels, and continue to express a healthy demand for leverage using derivatives contracts. We see similar levels in both BTC and ETH, despite ETH’s impending ETF launch, while open interest levels remain consistent with pre–sell-off levels. Perpetuals: While we don’t see a recovery in the number of open contracts to pre–sell-off levels, we do see a return to a moderately healthy positive funding rate paid from longs to shorts in all markets except TON. Options: Volatility at short tenors has rallied once again in response to short-term spot moves, first compressing the term structure and then steepening as the front end falls down once again. As it has done several times during short-term price volatility, short, sudden moves in spot price haven’t been enough to meaningfully lift long-run expectations of volatility.

While volatility has generally been on the rise for both BTC and ETH, the term structure of volatility has changed dramatically especially at shorter tenors, now having inverted at the front end and continuing to trade at a premium for ETH options compared to BTC options. Volatility skew suggests that call options are preferred for both digital currencies. A general bullish trend is observed but more strongly for BTC, as reflected in the future implied yield chart and the perp swap funding rate, if not the skew of its volatility surface. Despite the recent approval of an ETH spot ETF, BTC is still holds a stronger bullish sentiment in derivatives space.

Spot prices have performed a significant recovery since bouncing off the lower bound of their recent range almost one week ago. As a result, delivered volatility has stayed at its highs and has materially increased implied volatility at short-tenor options and inverted the term structure. The recovery has inspired a return to double digit yields implied by both BTC and ETH futures markets, but only the former asset sees a similar sentiment expressed by its perpetual swap funding rates. ETH still has its months-long-held volatility premium over BTC of around 10 points, but its short-tenors did not push as close to the levels at the back end of the term structure leaving its term structure slightly steeper.

Futures: Future-implied yields have recovered from their spike lower, but continue their downward trend over the month. Perps: Despite the recent bearish price action, we don’t see a widespread or persistently negative funding rate in perpetual swap markets except for TON. Open Interest in majors has fallen during the period of spot market volatility as traders close out positions Options: ETH volatility trades at a 10–15 point premium to BTC’s at all tenor points on the term structure, has recovered its volatility smile skew toward OTM calls much faster than BTC, and has seen incredible trade volumes in calls that far outweigh the activity in its puts. ETH derivatives markets continue to reflect different positioning when compared to BTC, which may be linked to hopes and expectations of the imminent launch of its first Spot ETFs in the U.S. However, ETH’s volatility premium above BTC is not a new phenomenon, and is also reflected in the increased realized volatility with which it has moved for much of the past month.

The latest venture of spot prices down to the bottom of their range has seen volatility levels at short tenors spike while traders rush to protect against further downside price action. While funding rates has remained steadily positive and short tenor future-implied yields have recovered some of their lost ground, volatility smiles remain skewed towards OTM puts and short tenor volatility has not fallen back from the levels of longer dated tenors. ETH retains its 10 vol point premium over BTC volatility at equivalent tenors and its term structure trades much flatter, continuing a trend that we have seen several times over the past month of range-bound price action.

As spot prices trade at their lowest levels since early May, we see a stark divergence in the sentiment priced in by BTC and ETH options markets. ETH continues to trade with a 10-15 volatility premium across the term structure, and the most recent move lower in spot prices has seen BTC vol smile skew turned decidedly bearish at short tenors while ETH smiles skew neutral or towards calls at all tenors. While the fall in future-implied yields has recovered to last weeks levels, funding rates in the two majors have repeatedly charged short positions since the 9th June -- a phenomenon that we observe across perpetual-swap markets.

As spot prices trade at their lowest levels since early May, we see a stark divergence in the sentiment priced in by BTC and ETH options markets. ETH continues to trade with a 10-15 volatility premium across the term structure, and the most recent move lower in spot prices has seen BTC vol smile skew turned decidedly bearish at short tenors while ETH smiles skew neutral or towards calls at all tenors. While the fall in future-implied yields has recovered to last weeks levels, funding rates in the two majors have repeatedly charged short positions since the 9th June -- a phenomenon that we observe across perpetual-swap markets.

This week's edition of our DeFi Analytics report.

Yields implied by futures prices have declined over the past week, steepening term structures that have experienced several inversions in the past month. The reduction in leverage has been more pronounced for BTC compared to ETH, as ETH's perpetual swap funding rate remains active but below the levels observed at the end of May. Volatility expectations are trending slightly upward, in line with the increased market choppiness over the last week, and ETH volatility markets continue to command a premium. Reflecting their futures markets, ETH's skew indicates slightly more bullish positioning than BTC's, with both vol smiles moving closer to neutral for shorter-dated expiries.

This week's edition of our DeFi Analytics report.

With BTC failing once again to break range highs, implied vol at the front-end of the term structure for both majors has increased over the last week, whilst vol at the back-end has either drifted lower, or continues to trade sideways. This had led to a more compressed term structure. The vol smile skew for BTC has largely traded sideways, and still remains skewed towards OTM calls. However, ETH is skewed towards OTM puts at short-dated tenors as implied vol for OTM puts has risen approximately 8% over the last week. In addition, demand for leveraged long exposure has fallen as investors look to exercise caution following BTC’s inability to break range highs. Annualised yields have fallen across the term structure, and funding rates continue to trade close to zero.

With few macro and crypto-specific events on the immediate horizon, volatility has largely continued to trade sideways in both majors over the past week as spot prices trade near range highs of $68.9K and $3.8K. The vol smile skew for BTC and ETH at short-dated tenors has increased from previous neutral levels, as implied vol for OTM puts has fallen. Over the past month, demand for leveraged long exposure in both majors has increased as futures yields have risen consistently, indicating that investors are willing to pay a premium above spot price in order to gain exposure to the underlying asset. Over a shorter lookback period of a few days, yields at short-dated tenors have fallen in both majors, although the long term trend remains intact.

Block Scholes' Crypto Senti-Meter aggregates several measures metrics to measure the sentiment expressed by crypto-asset derivatives markets. Our index methodology leverages 4 years of advanced derivatives analytics, and is strongly correlated with movements in spot prices.

Volatility has fallen across the term structure in both majors over the past week as they continue to trade near range highs of $68.9K and $3.9K. Following the news of an upgrade in the probability of an Ethereum ETF, implied vol spiked at the front-end, inverting the term structure. This inversion has since corrected itself, with implied vol at the front-end falling. BTC’s vol smile skew has fallen to more neutral levels as implied vol for OTM calls falls, indicating reduced short-term bullish sentiment. However, ETH is heavily skewed towards calls due to implied vol for OTM puts falling, as investors reposition themselves due to the recent ETF news. Demand for leveraged long exposure, which is stronger in ETH, fell at the start of the week, as indicated by spot yields, before rising again at the front-end.

In our report ahead of the Dencun upgrade in March, we forecast a swift migration of L2 transaction data to the new, dedicated blob space. We also expected the swift recovery in gas usage to the 15 million unit per block target, but at a much lower base fee due to the lower usage by L2s. While we were correct to predict a fall in the base fee burned, the impact on the net supply dynamics of ETH has been swifter than we expected. The new supply of ETH minted on the Beacon chain now outweighs the burned supply for the first time since the Merge, removing a potential tailwind that failed to support ETH against BTC during the last 18 months of under-performance.

Volatility has continued to gradually rise across the term structure, with ETH spiking at all tenors over the last day following an upgrade in the probability of an Ethereum spot ETF being approved. With implied volatility spiking particularly at the front-end, the term structure has become inverted. Implied volatility for ETH options now sits at levels not seen since April. The vol smile skew also recovered towards calls over the past week, but has since sold off at the front-end as investors rush to purchase OTM puts for downside protection as spot price reaches range highs of $71K and a $3.7K. Leverage in futures markets has increased, particularly at short-dated tenors which have risen beyond longer-dated tenors, indicating a demand for leveraged long exposure that is stronger for ETH.

This week's edition of our DeFi Analytics report.

Volatility has gradually risen across the term structure as BTC trades near its range lows of $60K, but has still not deviated from its longer term downward trend. ETH continues to trade 5-7 vols higher than BTC. Despite a strong start to the month where skew recovered following the spot sell-off which saw investors purchase OTM puts for downside protection, the skew at short-dated tenors has traded with some uncertainty recently. ETH’s skew continues to trade lower than BTC’s, indicating more bearish positioning. Leverage - indicated by perpetual swap funding rates and futures-implied yields - has increased, particularly at short-dated tenors which have risen beyond longer-dated tenors, indicating demand for leveraged long exposure as both majors sit at precarious levels.

This week's edition of our DeFi Analytics report.

Volatility has fallen following the recent spot sell-off, during which implied vol at short-dated tenors had spiked above longer-dated tenors and inverted the term structure. ETH continues to trade between 5-10 vols higher than BTC. In addition, the sell-off in spot saw a strong skew towards puts in both majors as investors became concerned with buying OTM puts for downside protection. This has since recovered - due to the selling of OTM puts - although ETH’s skew trades slightly lower than BTC at short-dated tenors, indicating more bearish positioning. Leverage as indicated by perpetual swap funding rates and futures-implied yields has increased slightly, but still remains far below the extremes observed in March.

This week's edition of our DeFi Analytics report.

Leverage as indicated by perpetual swap funding rates and futures-implied yields remains much lower than the extremes we saw ahead of the flush-out at the end of March. Implied volatility levels have crashed lower for both tokens and across their term structures, led by a significant under-performance in shorter-dated tenors. Vol smiles remain intermittently skewed towards OTM puts at short tenors as the market appears to brace for further downside in the short term. ETH vols trade some 5 vols higher than BTC’s across the term structure, with both future-implied yields and vol smile skews indicating more bearish positioning than in BTCs markets, particularly in the short term.

This week's edition of our DeFi Analytics report.

Following a bounce in spot price at range lows, BTC and ETH currently trade at $66K and $3.2K respectively. Funding rates remain close to zero for both majors, and future-implied yields are near their lowest levels in more than a month as BTC trades in the middle of its sideways trending range. In the past week, volatility at short-dated tenor options has fallen, correcting the front-end of BTC and ETH’s previously inverted term structures. The fall in volatility was matched by a recovery in skew from OTM puts to more neutral levels at all tenors less than 3-months, indicating that investors are less concerned with buying OTM puts for downside protection.

This week's edition of our DeFi Analytics report.

Funding rates and future-implied yields are near their lowest levels in more than a month after the weekend’s spot selloff took prices back to the bottom end of the sideways trending range. Volatility at short tenor options rallied, causing an inversion in both BTC and ETH’s term structures at the front end, without lifting volatility levels at longer-dated expiries. The rise in volatility was matched by a strong skew towards OTM puts of volatility smiles at all tenors less than 3-months, indicating a strong switch in sentiment towards a demand for downside protection.

This week's edition of our DeFi Analytics report.

ETH lead another attempt by spot prices to cross above the year-long highs recorded in March. With it, we saw a return to high levels of leverage in derivatives markets: high yields implied by futures prices, high perpetual swap funding rates, and a rally in short dated at-the-money implied volatility that briefly inverted the term structure. However, the rally was shorter lived and smaller in size than that which took BTC prices to all-time highs. Furthermore, while volatility continues to trade flat across the term structure at its higher, 70-80% range, futures markets report a collapse in funding back to their longer-held trend.

This week's edition of our DeFi Analytics report.

After reaching locals highs of $71k and $3.7k earlier in the week, both BTC and ETH spot prices have fallen. This pullback has resulted in a slight decrease in demand for leveraged long exposure, reinforced by the increased skew towards puts in the smiles of both majors. However, excess demand for downside protection is less extreme when compared to earlier in the month where the 25-delta risk reversal skew for BTC and ETH reached lows of -9% and -17% respectively. Rather, the bearish turn in derivatives appears to be a repeat of the leverage flush out that we have seen several times during this rally. Implied volatility has risen for both majors, and particularly in short-dated tenors which has resulted in a flattening of the volatility term structure from its previously steep shape.

This week's edition of our DeFi Analytics report.

After a pullback earlier in the week, both BTC and ETH have bounced to $70k and $3.7k respectively. Future-implied yields have risen, whilst implied volatility for both majors remains within a tight range. Perpetual swap funding rates remain positive, but low. The term structure for BTC and ETH - which was previously inverted - has corrected, with implied volatility at short-dated tenors falling below the volatility at long-dated tenors, suggesting reduced demand for long volatility exposure at shorter tenors. Furthermore, the 25-delta put/call skew has increased for both majors, indicating that traders are less worried about buying protective puts to hedge possible impending downside.

This week's edition of our DeFi Analytics report.

We previously observed increased demand for downside protection, indicating that the market may be positioning itself against any potential retrace. Following a rally to all-time high levels, the market has pulled back. Short-dated tenors show a significant decrease in spot yields for BTC and ETH, signalling a shift in near-term market sentiment. Funding rates, although positive, have cooled from their monthly highs, indicating reduced demand for leveraged long exposure. Fluctuations in BTC and ETH's ATM vols suggest ongoing market uncertainty. Additionally, the 25-Delta Risk Reversal has shifted towards puts at short-dated tenors, indicating a bearish sentiment that is more pronounced in ETH than BTC.

Future-implied yields and perpetual swap funding rate showcase the high demand for leveraged long exposure enjoyed by traders during the rally in spot prices to all-time high levels. We also see a slightly inverted term structure of volatility, suggesting high demand for long volatility exposure at shorter tenors. However, the breakthrough of the psychological $70K and $4K barriers has brought with it an increased demand for downside protection in 3- to 6-month tenor puts (and more prominently for ETH), indicating that the market may be positioning itself against any potential retrace below the freshly printed recorded levels.

This week's edition of our DeFi Analytics report.

Weekly crypto-derivatives market analytics, spanning futures, options, and perpetuals.

This week's edition of our DeFi Analytics report.

October has brought implied volatility back into the mid-50s once again, as strong demand for participation in any further upwards moves sees the skew of both majors volatility miles move further towards calls. Despite the strong anticipation, however, realised volatility remains very close to historical lows. This leaves the volatility ratio of both BTC and ETH options at its highest since 2019, a spread that we believe cannot be attributed entirely to ETF speculation.

Weekly crypto-derivatives market analytics, spanning futures, options, and perpetuals.

This week's edition of our DeFi Analytics report.

Weekly crypto-derivatives market analytics, spanning futures, options, and perpetuals.

The Ethereum network's pivot to a new consensus mechanism in September 2022 caused a dramatic shakeup to the reward system available to blockbuilders. Maximal extractable value, previously merely a popular side project for Proof of Work miners, has now become the most attractive reward stream for validators, and understanding its nuances is key to a profitable validator operation.

The Ethereum network boasts the biggest Decentralised Finance ecosystem of any blockchain, an ecosystem supported by a network of smart contracts that allow for composable blocks of code to be executed by validators in the form of onchain transactions. The computation required by a transaction is performed by the validators (analogous to Bitcoin's miners) who create new blocks on the chain and is paid for in ETH by the sender.

In mid-September 2022, Ethereum’s blockchain completed its long-awaited merge into a Proof of Stake chain, deprecating the Proof of Work system that has found consensus for the network since its inception in 2015. The Merge marks the most significant event in crypto to date, as the community has never seen such a drastic change to such a high-profile chain, and with such unpredictable consequences. It represents the culmination of many years of research and testing by both the Ethereum foundation and its community and is just one step on a long roadmap of planned upgrades.

Weekly crypto-derivatives market analytics, spanning futures, options, and perpetuals.

Ethereum has emerged as a prominent and transformative force in the world of blockchain and decentralised finance, revolutionising the concept of digital currencies and paving the way for countless innovative applications. With its robust infrastructure and vibrant ecosystem, Ethereum continues to captivate the imagination of developers, entrepreneurs, and investors alike with an evolving ecosystem. As part of that evolution, the Ethereum Foundation has released a roadmap of planned upgrades, intended to enhance the network’s scalability, security, and sustainability. The transition from a Proof-of-Work (PoW) consensus mechanism to a Proof-of-Stake (PoS) model in the Merge was the first (and maybe most ambitious!) of these upgrades. Completed in mid-September 2022, the shift required a stunning feat of blockchain and community engineering to put an end to Ether mining and instead derive the blockchain’s security and reliability from staking. After over two and a half years since the genesis block of the Beacon Chain, and ten successful months of PoS-powered blocks post the Merge, Ether staking has grown from infancy to an established & maturing practice.

In this second part of our examination of Ethereum staking rewards we will perform a deep-dive analysis of execution layer rewards, describe and assess the contribution of Maximal Extractable Value (MEV) to a staker’s income, and review the drivers of MEV and its link to price volatility. We hope that you enjoy the full report, from which several key findings are outlined below.

Crypto as a 24/7 market was the first to react to the macro sentiment and this same drop was shortly replicated across the global markets as they opened. We expect this correlation to continue into September, with a chance of significant volatility into the run up to the next Fed meeting. The extent to the Fed's dovish shift against Bank of Japan’s hawkish stance will be key factors in shaping how the macro sentiment evolves over the coming months.

Former President and Republican candidate Donald Trump has positioned himself as the pro-crypto candidate, leading Bitcoin to enjoy bullish price action as part of the "Trump Trade". The relationship between crypto and politics has become clear via Polymarket, an emerging decentralised prediction market on the Polygon blockchain that allows for 24/7 trading of a wide range of sporting and political events. As a result, Polymarket has become a go-to tool to monitor election odds and has frequently revealed a different perspective on the campaign.

A dramatic series of macro events have shaped the dynamics of spot and volatility so far this summer, causing tumultuous spot drops followed by sudden rebounds. Volatility has hence seen incredible peaks and fluctuations over the course of the past month, as well as market sentiment, with oscillating preference between BTC and ETH. The market also shows signs of cautiousness, with strong preference for OTM puts for shorter tenors but overall being bullish for the long term.

The sudden and unexpected approval of a spot ETH ETF in the US resulted in a drastically different response from volatility markets when compared to the length and heavily anticipated approval process of BTC's ETF in early January. Given the different flavour of uncertainty that comes with an approval but no start date, we see a significant premium assigned to ETH volatility at all tenors over BTC. In addition, ETH's OTM calls trade at a significant premium to its OTM calls across the term structure in stark contrast to the bearish positioning indicated by BTC's vol smiles, indicating bullish positioning ahead of a potential July trading date.

While the first quarter saw inflation refuse to continue the fall that it posted in the first half of last year, last week's CPI read of 3.4% marked the first fall in the pace of inflation of the year and took the wind out of the argument that a reacceleration in inflation may even see the Fed consider further hikes. With markets still pricing out many of the cuts that they foresaw at the turn of the year, we remain attentive to several metrics that may show the first signs of softening in the economy, evaluate the state of swaptions volatility markets, and consider the likely implications of the 3 week wait for June's NFP release on risky assets, and on Bitcoin volatility markets in particular.

The Bitcoin halving is a core feature of Bitcoin. Roughly every four years, the reward miners earn is halved in order to reduce the new supply of bitcoin to the market, ultimately resulting in a fixed, finite supply of 21,000,000. We cover the event's significant impact on the profitability of mining, and analyse how it has changed over the three halvings that the network has successfully processed. In the sequel, we will discuss the other side of the miner profitability coin – costs – and develop a mining cost metric that will allow us to compare the cost to mine a bitcoin with its market price.

Equities rallied in March 2023 as the US Banking Crisis indicated that the Fed's hiking cycle may be reaching its end. When they delivered several more hikes, equities reversed their gains. However, when the Autumn brought a second round of interest rate cut bets, equities rallied once more. This time, the market pricing those cuts out did not cause equities to retrace. Instead, we have seen a strong rally into the first quarter of 2024 that has not lead to an increase in implied volatility or protective put-buying skews of the volatility surface. What is driving the rally now, and how long can it be sustained?

Ethereum’s Dencun upgrade is intended to make storing Layer 2 blockchain data on Ethereum’s mainnet cheaper. This will be achieved by making changes (detailed in part one of this report) to the way that L2s pay for gas by creating an independent gas market for data storage. This decision has implications on the amount of gas used by non-L2 applications or users on the regular gas market, the amount of ETH that will be burned in each block (via the base fee) and the rate earned by Ethereum stakers.

On the 13th of March, Ethereum nodes are expected to implement an update to the network: EIP-4844, also known as “proto-danksharding”. This update introduces a new transaction type that is intended to reduce the cost of posting L2 rollup data to the Ethereum mainnet by including a dedicated storage space. We discuss the high transaction fees that motivate the upgrade, how EIP-4844 is intended to address this issue, and the implications proto-danksharding may have on the base fee, the amount of ETH burnt, and staking rates.

September saw the continuation of two trends: first, we continue to see OTM optionality priced near to its highest levels relative to the ATM level of implied volatility as the volatility smiles of both assets remain near to their historically steepest levels. Second, ETH’s implied volatility is still below the levels priced by BTC’s derivatives markets having continued the trend that it began following The Merge in September last year. However, a similar trend in the ratio of their realised volatility appears to have settled, with the ratio trading sideways near to 1 since the middle of 2023.

Several event risks are appearing on the horizon that indicate significant uncertainty for crypto-asset prices, including a follow-up ETF application deadline, the halving of Bitcoin's block reward, and two chances for the first cut in interest rates after the sharpest hiking cycle in decades.

The correlation of changes in BTC spot price to those of US equity indices has fallen since February of this year to a near-zero statistical relationship. Whilst both have retraced significant losses sustained in 2022, BTC's has recorded its strong YTD performance of +86% independently of movements in the both the S&P 500 and the Nasdaq 100 indices. We also observe a fall in the correlation between changes in the implied volatility of BTC and ETH as measured by our own implied volatility index, the BSIV. This index shows little correlation between the volatility implied by options on BTC and the S&P 500, despite a strong historical relationship between their spot prices

The year ahead will be the year of volatility. While the latest economic data do show signs that inflation is moderating, employment remains strong, and growth is resilient, market pricing is certainly tilted towards the probability of a successful soft-landing. The building expectations mean that any deviation from the best-case scenario path could see considerable corrections in the year to come, with heightened sensitivity in risk-on assets to macroeconomic data releases.

In September 2022, Ethereum eschewed its Proof of Work roots and switched to a Proof of Stake consensus mechanism. At the same time, it began a period of significant under-performance against BTC. Contrary to the consensus view that several tailwinds will see Ethereum outperform Bitcoin in the coming year, our analysis suggests that its inability to succeed against Bitcoin with existing pressures on supply indicates a structural re-pricing of the asset following the Merge.

In September 2022, Ethereum eschewed its Proof of Work roots and switched to a Proof of Stake consensus mechanism. At the same time, it began a period of significant under-performance against BTC. Contrary to the consensus view that several tailwinds will see Ethereum outperform Bitcoin in the coming year, our analysis suggests that its inability to succeed against Bitcoin with existing pressures on supply indicates a structural re-pricing of the asset following the Merge.