OTC Desk Market Update: Crypto Volatility Soars — Unlocking Crypto: Shifts in Volatility After FOMC

Market Update

Welcome back! Here are the top things we’ll be paying attention to this week:

• Weekly Options Expiry
• Initial Jobless Claims on Thursday

Macro Overview:

Once again, the FOMC has voted in line with market expectations and kept rates unchanged. What’s even more interesting is that Jerome Powell’s press conference struck a more dovish tone than investors had anticipated. Recent data releases, most notably Q3 GDP, had led investors to expect Chairman Powell to emphasize the possibility of future rate increases. However, Powell maintained that a soft landing wasn’t guaranteed but remained a possibility. As a result, the markets finished the week on a positive note after a challenging end to October, during which cryptocurrencies outperformed stocks.

On Friday, November 3, 2023, the US Bureau of Labor Statistics (BLS) unveiled its latest labor market data in the form of the October 2023 Employment Situation Summary. The report indicated a modest increase in payroll employment, with a gain of just 150,000 jobs, marking a notable decline from the previous month’s growth. The unemployment rate also inched upwards from 3.8% to 3.9%. While some may interpret these statistics as a sign of a weakening trend, it prompts us to question the appropriate benchmark for evaluation. Some analysts argue that the aggregates are gradually returning to pre-pandemic levels, amidst the pandemic’s disruptive impact. On the other hand, an alternative perspective suggests a slowdown may be underway. To distinguish between these two hypotheses, we’ll need to await the next month’s data. After a few months of experiencing real wage increases, there is now a noticeable slowdown in nominal wage growth, which trails behind the moderating inflation rate.

Crypto Market Overview

Relative Value: Ethereum vs. Bitcoin: Ethereum-Bitcoin spread reached historic extremes when Bitcoin’s price soared, but it has since contracted, with Bitcoin holding a premium of approximately 3–6 Vols in the 90-day maturity.

ETF Exhaustion?: With no new ETF news market participants appear to be shifting focus to altcoins, like Ethereum. Ethereum’s historical volatility and recent performance suggest it may no longer be overshadowed by Bitcoin. Solana’s performance over the last month is another indicator that investor sentiment may be shifting.

Realized and Implied Volatility

The recent crypto rally led to heightened excitement and a surge in implied volatility (IV) in both assets. While IV has receded from its peak in the 70’s, it remains elevated (currently in the mid 50’s). Realized volatility (RV) provides insight into actual price movements, and here, we see a divergence between short-term and long-term RV. The 10-day RV suggests stability, but the 5 and 7-day RV captures the recent significant 10% price move, revealing a more dramatic drop in RV, back to the 30s. This divergence implies that the market may not have entirely priced in the recent rally’s impact, keeping IV relatively high.

Term Structure and Skew

Bitcoin term structure has shifted back into contango during the week after briefly being in backwardation. Realized volatility falling has led to significant reductions in volatility in the front end (7–10 Vols), middle of the curve (3–4 Vols), and back end (1.5 Vols). Ethereum shows a different pattern, with an increase in volatility for maturities one month or longer. This is partially due to short covering flows.

Bitcoin skew has been exceptionally volatile. Initially, it flattened due to profit-taking in calls and hedging before the FOMC announcement, which prompted put buying. However, when the Fed decided to keep rates unchanged, call buying resumed, leading to an increase in call skew. Ethereum’s skew remained more stable and didn’t experience the same profit-taking as Bitcoin. Still, call skew surged due to the potential seen in Ethereum’s price action. Front-end call skew in Ethereum has increased, while the back end has also maintained significant call premium, suggesting market participants are favoring long-dated Ethereum call options.

Option Flows and Gamma Positioning

Bitcoin options trading experienced a significant increase, with volumes surging by 75% to reach a record high of approximately $12 billion on Deribit. Notable trades include the rolling of December 29th calls to higher strike prices, now within the $40K-45K range, and bullish risk reversals in the November 24th options at the $32K/$38K strikes. Ethereum flows also saw a 90% increase, primarily driven by short covering after the continued rise in price. As we mentioned last week, the trend of selling ETH call options, which had been popular throughout the year, was unwound following the recent price surge.

Bitcoin gamma positioning indicates that market makers are still short calls at the 35K strike, making it a critical level. Dealers that are short calls will need to hedge their positions by purchasing the underlying asset, in this case Bitcoin, if the price surpasses $35K. Ethereum faces a similar situation, with the highest concentration of short gamma at the $1900 strike. Any move above this level will trigger a similar reaction from dealers in ETH options.

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.

Disclaimer:

This newsletter is for informational purposes only and does not constitute investment advice or an offer to sell or a solicitation of an offer to buy any securities or other financial instruments. The information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of the available data. Past performance is not a guarantee nor a reliable indicator of future results. Please consult your financial advisor before making any investment decisions.

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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.