OTC Desk Market Update | Crypto Market Volatility - Is Bitcoin's Implied Vol Signalling a Bigger Move?
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.)
Inflation Reading Meets Expectations
U.S. Consumer Price Index (CPI) inflation came in at 0.2% month-over-month and 2.6% year-over-year, both numbers in line with analyst estimates. The yearly headline increase was a function of a low monthly print from September 2023 falling out of the rolling average calculation, rather than a spike in current prices. The Core measure of CPI, which excludes more volatile food and energy prices, rose 0.3% month-on-month and 3.3% on an annual basis, also in line with expectations. Under the hood, the main driver of CPI inflation continued to be shelter prices. The shelter index, which carries about a 34% weighting in the headline CPI, advanced 0.4% in October and 4.9% on an annual basis. However, many experts believe that the Bureau of Labor Statistics (BLS) method for reporting on shelter prices causes this data point to lag real-time market measures by a significant degree.
After Retail Sales Hold Firm, Powell’s Speech Sparks Uncertainty About Rates
U.S. Retail Sales data for October showed an increase of 0.4%, in line with expectations. September’s figure was also revised upward to 0.8% from the 0.4% previously reported, suggesting consistent and better-than-expected growth in consumer spending. Gains were strongest at electronics and appliance stores, which advanced 2.3%, and sales at auto dealerships, which grew by 1.6%. Continued strength in consumer spending, combined with consistent inflation readings near expectations and the prospect of a Trump administration with a sharp focus on economic growth through tariffs and tax cuts, have led to some uncertainty about the Federal Reserve’s path of monetary policy. On Thursday, November 14th Fed Chair Jerome Powell made a widely-followed speech where he said, “the economy is not sending any signals that we need to be in a hurry to lower rates”. This was Powell’s clearest directional statement in recent months, and caused a re-pricing in stock and bond prices, which had been expecting consistent loosening of monetary policy from the central bank. At the time of this writing, the markets are pricing in a 62% probability of a 25 basis-point interest rate cut at the next Federal Reserve meeting on December 18th, which will be the last Fed decision before president-elect Donald Trump takes office in January.
Market Reaction
The S&P500 index fell 2.3% on a weekly basis and closed at 5,870 points as traders took profits following last week’s post-election rally. Most of the selling pressure came late in the week, as markets digested the comments from Fed Chair Powell, re-pricing stocks and Treasury yields for a slightly more uncertain interest rate outlook. That said, there are plenty of catalysts for the U.S. stock market going into the end of the year. Following earnings season, the “buyback window” will be re-opened for U.S. companies, which some analysts suggest will add $6 Billion USD in daily liquidity. Additionally, the end-of-year “window dressing” of actively managed funds getting into market-leading equities before end-of-year reports are due has the potential to kick off to the so-called “Santa Claus Rally” in stocks. On the crypto side, Bitcoin (BTC) continued to run, starting the week at approximately $77,000 USD and closing over $90,000 USD, a nearly 20% move. Bitcoin’s market cap crossed $1.8 Trillion USD, surpassing Silver as the eighth-largest asset in the world by market cap. The global crypto market cap is now over $3 Trillion USD.
The Week Ahead in Global Macro
Inflation is the theme of the coming week in global markets. CPI reports will be released in Canada, the United Kingdom (U.K.) and the Euro Zone. Canadian inflation is forecast to rise 2.1% year-over-year and 0.3% on a month-over-month basis, though this reading will be closely watched after September’s surprise reading of –0.4% monthly change. CPI in the U.K is expected to rise 2.2% year-over-year, which would be an uptick from 1.7% at last reading. In the Eurozone, CPI is forecast to fall right in line with the European Central Bank’s target of 2.0% for a second consecutive month. Housing data is also due from authorities in both the U.S. and Canada. American national housing starts are expected to come in at 1.340 million, a small –0.5% pullback from the previous report of 1.345 million. In Canada, the forecast is for 239,000 housing starts, versus a previous report of 223,000.
Crypto Market Overview
The past week has been a period of divergence in Bitcoin (BTC) and Ethereum (ETH) markets, with volatility dynamics reflecting caution and uncertainty. Implied Volatility has increased slightly for both assets, with Bitcoin showing more pronounced fear and risk compared to Ethereum. The Term Structure for Bitcoin reflects short-term caution, while Ethereum's term structure shows a more balanced outlook. In terms of Options Flows and Positioning, both markets have seen increased hedging activity, with Bitcoin options showing a clear preference for downside protection, while Ethereum flows remain more balanced. As we move forward, the key drivers of volatility will likely be macroeconomic developments, particularly those tied to regulatory news or broader market sentiment. The current options market signals suggest that traders are cautiously positioned, awaiting catalysts that could trigger larger moves in either direction.
Implied and Realized Volatility
The Implied Volatility (IV) for Bitcoin has seen a slight increase this week, as market participants priced in greater uncertainty ahead of potential regulatory developments and macroeconomic news. BTC's 30-day implied volatility (IV) stands at 45.5%, which represents a moderate increase from last week's level of 43%. This shift indicates that traders are factoring in potential price swings, possibly driven by external factors such as US Federal Reserve statements or geopolitical events. IV levels for BTC have been significantly higher than ETH, indicating a greater perception of risk in Bitcoin, likely due to its larger market cap and higher sensitivity to external news flows. However, compared to historical levels, BTC's IV is still relatively low, suggesting that a significant shock is not currently anticipated, but market caution remains. Ethereum has experienced a similar but more muted increase in implied volatility. ETH's 30-day IV has risen to 40.7%, up from 39% last week. This suggests a more stable market outlook for ETH in comparison to BTC. However, the gap between BTC and ETH's IV is still substantial, with BTC’s implied volatility consistently higher over the past month. This indicates that the market perceives BTC as a riskier asset at present. ETH's IV is typically lower due to its larger presence in decentralized finance (DeFi) and staking, which provide more predictable demand dynamics relative to Bitcoin's speculative nature. Realized Volatility (RV) has mirrored implied volatility to a degree but has been more subdued. BTC's 7-day realized volatility is approximately 3.2%, indicating smaller-than-expected price movements on a daily basis. Over the latter part of last week, BTC has remained in a tight range, reflecting a period of consolidation rather after a sharp breakout. A volatility compression pattern has formed, which often precedes a larger move. Although the realized volatility is low, the gradual increase in IV signals that traders are bracing for potential outlier price action.
ETH’s realized volatility over the past week stands at 2.8%, reflecting less movement compared to Bitcoin. ETH’s price action has largely moved lower after an initial burst early in the week. This relatively low RV can be interpreted as a market that is digesting its recent gains and awaiting further catalysts for price action.
Recommended by LinkedIn
Term Structure and Skew
The term structure of BTC options has shown a backwardation pattern, particularly in the shorter expiry dates (1-week to 1-month). This indicates that traders expect a potential near-term event that could lead to significant volatility, which has been the theme over the past week. The front-month contracts have higher implied volatility compared to longer expirations, suggesting that the market is pricing in immediate uncertainty—likely stemming from macroeconomic risks, such as inflation data or possible central bank moves.
Beyond the short-term expirations, the term structure flattens, with implied volatility for 6-month and 1-year options being relatively stable around 50%. This suggests that traders are not pricing in significant long-term volatility, perhaps due to confidence in Bitcoin’s mid-to-long-term outlook, despite short-term noise.
ETH’s term structure is less pronounced but still features a mild contango in the 3-month to 6-month period, where longer-dated options have slightly higher implied volatility. This suggests that the market is pricing in more potential risk further out in time, possibly linked to upcoming protocol upgrades (e.g., Ethereum network improvements) or regulatory shifts in the DeFi space that could have a delayed impact on ETH.
The front-end of the curve (1-week to 1-month expirations) remains stable with little premium, which reflects the market's expectation of minimal price action in the immediate term. However, the term structure’s shape suggests that investors are starting to look toward the future with a more cautious stance, possibly anticipating challenges in the broader cryptocurrency market.
The skew for Bitcoin has been slightly negative, with put options (bearish bets) carrying a higher implied volatility than call options (bullish bets). This negative skew is a common feature in markets that are facing a risk-off sentiment, where traders anticipate a higher probability of downside moves, which could be beginning to percolate given that Bitcoin has advanced significantly and may be due for a pullback.
Over the past week, the skew has slightly widened as Bitcoin's price has hovered around key short-term support levels, raising concerns about potential sell-offs if the support fails. The 1-week skew remains notably negative, signaling that traders are leaning towards downside protection.
Ethereum's skew is less pronounced but also negative, though not as extreme as Bitcoin's. ETH’s 1-week put/call skew is around -3%, indicating mild bearish sentiment but not as pronounced as Bitcoin’s. Given Ethereum’s role in DeFi and the staking sector, there seems to be less fear of an impending sharp correction in the short term. The skew suggests traders are hedging against downside risk, though the overall mood for ETH remains relatively stable.
Options Flows and Positioning
Bitcoin options flows over the past week have seen an uptick in protective put buying, signaling that traders are positioning for potential downside risk. The demand for puts reflects caution, particularly with Bitcoin trading near significant short-term support levels. At the same time, call options have been less popular, indicating that traders are less inclined to take large bullish bets on BTC at this time. Ethereum has seen more balanced options flows, with flows skewed towards neutral strategies, such as straddles and strangles. The open interest and relative balance between calls and puts reflects an expectation of ETH staying within a defined range over the next 1-2 weeks. The options market for Bitcoin shows a neutral-to-bearish sentiment, with a slight preference for downside protection rather than aggressive upside bets. The increase in protective put buying aligns with the observed rise in implied volatility, as traders prepare for possible sharp movements. The overall positioning in Ethereum options remains neutral-to-bullish, with traders not aggressively positioning for large price moves in either direction. The balanced options flow suggests that market participants expect a period of consolidation before taking clearer directional bets.
As always, our team is here to assist you and provide services tailored to your specific needs. If you would like to discuss these topics further, we invite you to book a meeting with our team.
To schedule a meeting, please visit NDAX OTC | Bitcoin and Crypto OTC Trading Desk or contact your OTC representative directly. We look forward to assisting you on your investment journey.
Don’t forget to follow us on social media for more updates and join the conversation on our forums.
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.