OTC Desk Market Update | Analyzing Implied vs Realized Volatility in BTC and ETH
Welcome back to our weekly market update! Here are the top things we’ll be paying attention to this week:
Macro Update
United States (U.S.)
PCE Inflation in Line With Expectations, Odds for Rate Cuts Rise
The Personal Consumption Expenditures (PCE) inflation report for October showed 0.2% growth and 2.3% growth year-over-year, matching expectations. The Core PCE measure, which removes more volatile food and energy costs, rose 0.3% in October and 2.8% year-over-year, meaning that there is still some inflation in the discretionary services side of the economy. The prospect of continued higher-than-expected inflation and the potential impact of a tariff-heavy approach from the incoming U.S. President did not seem to change market expectations of further easing of monetary policy. At the time of this writing, markets are pricing in a 66% chance that the Federal Reserve will cut the key interest rate by 25 basis points at their December 18th meeting, versus a 50% chance at the beginning of last week.
Bonds Rally on Robust GDP Growth, Incoming Treasury Secretary Plans
The final estimate for Q3 Gross Domestic Product (GDP) came in at 2.8% growth year-over-year, in line with expectations. A 3.5% increase in consumer spending over the quarter was the primary driver of GDP growth, though government spending also grew 5% on the back of increases in defense spending.
In related news, Scott Bessent was nominated by President-elect Trump as the next Treasury Secretary, one of the most influential offices for economic and fiscal policy. Bessent summarized his plans in something called the “3–3–3 Rule”, which has the following goals:
Bond markets seemingly approved of Bessent and his strategy, as prices rallied, and yields fell in wake of his nomination announcement. The 10 Year US Treasury Yield fell this week from a peak of 4.32% to settle at 4.18%, while the 2 Year Yield fell from 4.23% to 4.06%.
Market Reaction
The S&P 500 index rose 0.21% during the trading week, which was shortened by the Thanksgiving holiday in the U.S. As discussed previously, Treasury bond prices also rose, and volatility measures in both stock and bond markets fell. On the crypto side, Bitcoin (BTC) took a pause this week, closing essentially unchanged at approximately $97,500 USD. The big winner this week was XRP, which rose approximately 50% to $2.18 USD. The overall crypto market cap sits at $3.44 Trillion USD and the fear-and-greed index sits at 82, down slightly from 87 last week.
Canada
Trump Tariff Threat Startles Markets
President-elect Trump sparked panic among Canadian government and business leaders with a series of social media posts last week where he stated an intention to hit Canada, as well as Mexico, with 25% tariffs on all goods unless actions were taken by both governments on border security and drug trafficking enforcement. The federal government and several provincial premiers were quick to offer statements in response to the threat, citing a desire to work closely with the Americans on security and deepening trade ties across the border. Prime Minister Justin Trudeau also flew to Florida to personally meet with Trump, but it is unclear at this time whether the tariffs will actually be imposed on January 20th, Trump’s first day in office. The Canadian Dollar fell sharply on this news, with the USD/CAD exchange rate moving nearly 1.5% in a day, a huge move in the normally stable foreign exchange markets.
Another Lacklustre GDP Report
The Latest GDP report showed just 1.0% annualized growth in Canada, in line with expectations but less than the conservative estimate of 1.5% growth provided by the Bank of Canada (BoC) at the beginning of 2024. Household spending increased by 0.9%, while spending at the municipal, provincial and federal levels in Canada also rose. Without the government spending component, headline GDP would have declined. Declines were seen in important sectors such as housing investment, renovations and exports, and business investment. At a per-capita level, GDP fell 0.4%, marking the sixth consecutive quarterly decline in living standards for individual Canadians. The one bright spot is that the savings rate for households increased to a three-year high of 7.1%, up from 6.2% in Q2. After the GDP report, the odds of a 50-basis point cut at the BoC’s next meeting grew to approximately 50%.
The Week Ahead in Global Macro
It’s labor week in the U.S., with the big three employment reports due toward the end of the week. First, the Job Openings and Labor Turnover Survey (JOLTS) will be released on Tuesday, December 3rd, followed by the ADP Employment report on Wednesday, December 4th and finally the Bureau of Labor Statistics (BLS) Nonfarm Payrolls report on Friday, December 6th. The ADP report is forecasting 166,000 new jobs, versus a prior month’s report of 233,000, while analysts looking at the Nonfarm Payrolls Report are forecasting a whopping 202,000 new jobs, which if confirmed would ease concerns after October’s report showed only 12,000 new jobs added across the U.S. The latest Canadian unemployment report will be released by Statistics Canada on Friday, December 6th. Expectations are for an increase of 14,500 jobs nationwide, but as always, the composition of full-time vs part-time employment and the sectors that created the jobs will be as important as the headline figure in determining what the data says about the health of the Canadian labor market.
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Crypto Market Overview
The past week has been marked by notable volatility in both Bitcoin (BTC) and Ethereum (ETH), with volatility levels aligning between implied and realized metrics. For Bitcoin, the market appears to be in a neutral stance, with modest bearish sentiment reflected in the negative skew and mild demand for puts. Meanwhile, Ethereum has seen more pronounced volatility and a more optimistic sentiment in its options flows, with larger institutional involvement and a positive skew favoring calls.
Implied and Realized Volatility
Over the past week, Bitcoin’s volatility has been notable, with both implied and realized volatility showing divergence at key points. Bitcoin’s implied volatility (IV), which reflects market expectations of future price movements, remained elevated but gradually softened from the highs observed earlier in the month. As of the end of the week, Bitcoin’s 30-day IV stood at around 55%, reflecting a moderate premium over its historical levels. This is likely a result of the continued market uncertainty surrounding macroeconomic conditions, particularly in relation to global interest rates and inflation fears. Ethereum’s implied volatility showed similar trends to Bitcoin’s, hovering around 55% over the week, indicating a heightened sense of uncertainty among traders. However, ETH’s implied volatility curve is steeper than Bitcoin’s, reflecting a higher premium being priced in for shorter-term moves, possibly due to the ongoing developments in the Ethereum network, such as potential upgrades or changes in protocol.
Additionally, ETH options market pricing also points to increased sensitivity to altcoin market behavior, as the ecosystem is more volatile in comparison to Bitcoin. In terms of realized volatility (RV), which measures actual price movement over a specific period, Bitcoin has demonstrated a significant shift. The past week saw a return of high volatility with BTC experiencing sharp intraday moves, including a brief 5% drop followed by a recovery. The realized volatility for the past 7 days was recorded at 55%, almost identical to the implied volatility, suggesting that market participants’ expectations for future volatility closely mirrored the actual price movements. This alignment indicates that the market is currently pricing in a stable environment with occasional spikes, but no major directional shift in the near future.
Realized volatility for Ethereum has been slightly higher than that of Bitcoin over the past week, coming in at 58%. Ethereum’s higher realized volatility can be attributed to the smaller market cap and the increased potential for price swings when large trades are executed. Ethereum’s price also tends to be more sensitive to broader altcoin movements, which are often more volatile than Bitcoin. The 7-day price action of ETH included a 6% swing, which was larger than Bitcoin’s moves, indicating the higher risk profile associated with Ethereum.
Term Structure and Skew
The term structure for Bitcoin’s options market has shown a relatively neutral shape, with little curvature at both the short and long ends of the maturity spectrum. The front-month contracts (30-day) have been priced higher, but the difference between the near-term and longer-term volatility expectations has been relatively narrow. This reflects market participants’ general outlook for a stable Bitcoin price in the medium term, with no clear consensus on major price changes in the coming months. The term structure for Ethereum options has been steeper than Bitcoin’s, with a noticeable premium for shorter-dated options. This suggests that the market is pricing in more uncertainty over the near term, likely driven by network developments, regulatory news, and the potential for larger market moves in the ETH ecosystem. Longer-term contracts, on the other hand, reflect a more cautious outlook, indicating that investors are not fully optimistic about large price movements for Ethereum beyond the next couple of months. In terms of skew, the BTC options market has displayed a mild negative skew, meaning that out-of-the-money (OTM) puts are slightly more expensive than OTM calls. This could indicate that investors are hedging against potential downside risk in case of a sharp market pullback, but the overall demand for puts has not been excessive. This subtle bearish bias could be attributed to the ongoing macroeconomic uncertainties, particularly the Federal Reserve’s stance on interest rates, which could impact Bitcoin’s performance if liquidity conditions tighten further. Ethereum’s skew has been more pronounced than Bitcoin’s, with a noticeable positive skew. This suggests that calls (betting on price increases) are more expensive than puts (betting on price declines), which could be an indication of bullish sentiment in the options market. This positive skew might reflect optimism regarding Ethereum’s long-term value, potentially fueled by the growing interest in decentralized finance (DeFi) and non-fungible tokens (NFTs), as well as ongoing improvements to the Ethereum network (e.g., scalability upgrades and the shift to Ethereum 2.0).
Options Flows and Positioning
The options flow for Bitcoin this week has been relatively balanced, with significant activity observed across both call and put options. However, the majority of the flow has been concentrated in out-of-the-money (OTM) call options, suggesting that traders are positioning for upside potential. This could be indicative of a speculative market or institutional bets on a potential price rally if favorable conditions materialize. While there has been some hedging with put options, the overall sentiment remains neutral to mildly bullish, as evidenced by the preference for long calls. The options market for Ethereum saw a notable surge in call option activity this week, particularly in the 1–2 months maturity range. This suggests that traders are optimistic about Ethereum’s price prospects, potentially due to the expectation of positive developments in the Ethereum network and its broader ecosystem. The shift in Ethereum’s options flow indicates an increased demand for higher-risk, higher-reward strategies, with traders positioning for a larger move in ETH prices over the next month. Large institutional trades have been observed in the December 2024 call options, suggesting that there is confidence in Bitcoin’s price stability and a potential breakout in the medium to long term. However, the positioning remains cautious, as these positions are largely hedged by the concurrent purchase of put options, protecting against unexpected volatility. In contrast to Bitcoin, the Ethereum market showed less hedging activity with puts, which suggests a less cautious outlook among market participants. This could be attributed to the greater optimism surrounding Ethereum’s future, despite the overall volatility in the broader altcoin market. Additionally, the flow of options has been skewed toward larger-sized trades, indicating institutional involvement and professional positioning, likely betting on medium-term upside driven by network upgrades or macroeconomic conditions favorable to risk assets.
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Disclaimer: This article is not intended to provide investment, legal, accounting, tax or any other advice and should not be relied on in that or any other regard. The information contained herein is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of cryptocurrencies or otherwise.