Block Scholes x Bybit Crypto Derivatives 19th July
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.
Block Scholes BTC Senti-Meter Index
Block Scholes ETH Senti-Meter Index
Block Scholes’ Senti-Meter index aggregates the funding rate, future-implied yield, and volatility smile skew into a single expression of sentiment in derivatives markets — see more in the methodology article here.
Macro, Tech & Regs
Macro Calendar & Recent Events
- U.S. Presidential Election — July 21, 2024 — President Biden dropped out of the presidential race following calls for him to step aside, and uncertainty remains around the next Democratic presidential nominee.
- Trump Assassination Attempt — July 13, 2024 — the former president’s chances of a second term were positively impacted by last weekend’s events, resulting in a recovery rally for crypto as Trump emerges as the pro-crypto candidate.
- ECB Monetary Policy Meeting — July 18, 2024 — The ECB holds interest rates at 3.75% after beginning their cutting cycle at their previous meeting.
- Federal Reserve Meeting — July 31, 2024 — Expected to hold rates steady at 5–5.25% target range.
Fed Funds Rate — Market expectations of cuts to the federal funds rate range have increased, since pricing out almost any chance earlier in the year.
Regulatory Developments
- Republican candidate Donald Trump is set to speak at the BTC Nashville conference (July 25–27, 2024), further leaning into his developing position as the pro-crypto candidate for the presidency.
- The SEC is set to approve final regulatory documents and clear the final hurdles before each ETH Spot ETF is able to begin trading, after the initial approval saw an ETH price rally in mid May.
Futures Volumes Rise During Spot Volatility
The recovery of futures implied yields (as shown by the charts on the following page) has seen a large increase in the total open interest of futures contracts, a point that’s particularly strong in BTC’s futures markets.
However, it’s ETH’s futures term structure that shows the strongest rally in yields at short tenors, resulting in a much flatter term structure of yields ahead of a hotly anticipated start-of-trading announcement for its Spot ETFs later.
Bybit Futures Swap Open Interest
Bybit Futures Trading Volumes
Futures Yields Trade Lower
BYBIT BTC & ETH ANNUALIZED YIELDS — BTC yields are slightly inverted at the front end
BYBIT BTC ANNUALIZED YIELDS — Show a strong recovery from the crash during the spot sell-off in early July
BYBIT ETH ANNUALIZED YIELDS — Settle at similar rates to those for BTC, displaying a swift recovery in sentiment as expressed by demand for leverage
Perp Open Interest Recovers
As with futures markets, perpetual swaps see a return to the levels of open interest that were lost in the sell-off in early July. This is matched by a return to a moderately healthy funding rate paid by long positions to shorts across perpetual swap markets, except for TON, which retains its consistently negative rate.
We don’t see a bullish demand for leveraged long exposure being expressed in ETH’s perpetual swap markets, and would expect a higher positive funding rate for ETH, given that BTC’s funding rate spiked in January 2024 ahead of its own ETF launch. Instead, ETH’s funding rate merely matches the levels expressed by BTC and altcoins.
Bybit Perp BTC & ETH Open Interest - Open interest falls in both majors during the spot market rout as traders close positions
Bybit Perp Trading Volumes - Both BTC and ETH see a spike in trade volumes, but ETH outperforms its recent history by more
Volatility (Finally) Delivers
Implied volatility has recovered back above the level of delivered volatility that saw spot prices crash and then re-rally in early July 2024. The ratio between realized and implied volatility has flipped back above 1, due to a fall in realized volatility, as spot prices settle back at their pre–sell-off levels. In addition, we’ve seen a climb in implied volatility as markets adjust to the increased level of choppiness in spot prices over the past two weeks. The premium assigned to ETH volatility is larger than that for BTC, suggesting that traders are seeking or hedging exposure to ETH ahead of its impending ETF launch date to a greater extent than they are for BTC.
BYBIT BTC IMPLIED AND REALIZED VOLATILITY — Delivered volatility has moderated over the past week
BYBIT ETH IMPLIED AND REALIZED VOLATILITY — Shows the same premium over BTC’s delivered volatility that has consistently been expressed in implied volatility
BTC Options
Implied volatility levels rose across the term structure during a rush for exposure to the upside move in BTC spot prices. However, despite seeing a compression of the term structure as short-tenor options rallied to match the more stable, longer-tenor levels, we’ve since seen this move rapidly reverse.
The increased skew toward OTM calls hasn’t yet let off, however, reflecting a stronger demand for exposure to further upside at all tenors.
BYBIT BTC OPTIONS VOLUMES
BYBIT BTC OPTIONS OPEN INTEREST — The open interest in calls outweighs the open interest in puts, despite a vol smile skew toward the latter
BTC Volatility Trails Off
BYBIT BTC & ETH Volatility Term Structure — Is much flatter than last week, despite falling at the front end in the past couple of days
BYBIT BTC SVI ATM IMPLIED VOLATILITY — Volatility falls at the front end as the spot price rally has plateaued at higher levels
BYBIT BTC 25-Delta Risk Reversal — Short tenor volatility smiles continue their trend of skewing away from OTM puts and further toward upside exposure in OTM calls
ETH Options
We’ve seen a marked drop-off in trade volume over the past four days, as spot has ground to a halt and delivered volatility has dropped. Open interest in both calls and puts has failed to recover its pre–sell-off levels, but calls continue to dominate open positions in the market.
ETH volatility metrics have expressed the same movements as BTC’s over the past two weeks of action, but with the same volatility premium of some 10 points across the term structure that has become the new normal.