OTC Desk Market Update: Volatility Trends in Bitcoin and Ethereum - What Traders Need to Know
Welcome back to our weekly market update! Here are the top things we’ll be paying attention to this week:
Macro Update
Fed Holds Rates Steady, Signals One Cut In 2024
The U.S. Federal Reserve kept its benchmark interest rate unchanged at its June meeting, signaling that just one rate cut is expected before the end of 2024. This was a more hawkish stance than markets anticipated, with the Fed removing two of the three rate cuts projected in March from its forecasts.
Modest Progress On Inflation
The Fed acknowledged "modest further progress" toward its 2% inflation target in recent months, a slight upgrade from its previous assessment of a "lack of further progress". However, it maintained that inflation remains elevated, despite easing over the past year. The S&P 500 rallied to a record high after the statement, as traders seemed encouraged by the Fed's comments on inflation.
Dot Plot Signals More Aggressive Rate Cuts In 2025
While the Fed's dot plot of individual rate projections indicated a more aggressive cutting path in 2025, with four reductions totaling a full percentage point, the overall path through 2025 was less dovish than in March. The committee now sees five total cuts equaling 1.25 percentage points, down from six cuts in March, leaving the federal funds rate at 4.1% by the end of next year.
Higher Long-Run Rate Projection
The Fed's projection for the long-run rate of interest, a level that neither boosts nor restricts growth, moved up to 2.8% from 2.6%. This shift suggests that the higher-for-longer narrative is gaining traction among Fed officials, indicating a more hawkish stance down the road.
Mixed Economic Data And Resilient Inflation
While economic data softened in the first quarter of 2024, with GDP rising at just a 1.3% annualized pace, recent months have shown a mixed picture, with the Atlanta Fed tracking GDP growth at a solid 3.1% pace. However, inflation data has remained resilient, posing problems for central bankers and thwarting market expectations for a vigorous pace of rate cuts.
Crypto Market Overview
Weekly and Monthly Returns (%)
Implied and Realized Volatility
Though crypto markets have sold off over the last two weeks, realized volatility and implied volatility have remained relatively low. Realized volatility, which measures the actual price fluctuations, has continued to drift lower, hitting lows of around the mid 30’s for Bitcoin (BTC) and mid-40’s for Ethereum (ETH).
Implied volatility, which reflects the market's expectations of future volatility, softened by approximately two points in the one-month bucket. Despite this overall decline, a slight bounce after being in oversold conditions was observed over the weekend, coinciding with an increase in spot prices. The carry remains positive at around 20 vol for both Bitcoin and Ethereum, indicating that gamma sellers, who sell options to benefit from stable markets, are still being rewarded for now.
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Term Structure and Skew
Term Structure
Front end term structure, particularly the weekly options expiring this Friday, experienced a significant pop of about six points. For this coming week, there was a smaller increase, while the rest of the curve saw a decline of about one vol point for Bitcoin. Ethereum saw a similar pattern, with a six vol point increase in the front end and a one to two vol point decline from July onwards.
Skew
In terms of skew, there has been an increase in call demand across the entire curve in both major assets. The firmness in gamma suggests that market participants are using super short-dated options to manage their risk. The long end of the curve shows rising Vega (volatility), as call buyers begin to increase their bullish bets after two weeks of put dominance.
Options Flows and Positioning
Bitcoin
Flows in Bitcoin were dominated by short-term put options as markets declined last week. Short-term options are less sensitive to vega (volatility) and more sensitive to gamma (the rate of change of delta) making them a better instrument to take advantage of directional moves in a low volatility environment. Heading into the new week, we see a shift in preference for calls vs puts in Bitcoin, with other notable trades including short puts and bull call spreads.
Ethereum
Ethereum's options market, mirroring Bitcoin, has experienced a significant shift from puts to calls. This trend is more pronounced for Ethereum, largely due to U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler's recent remarks about the potential introduction of a spot ETF for ETH during the summer. The anticipation surrounding the ETF is driving similar market dynamics to those seen in Bitcoin earlier this year, with traders taking aggressive long positions in calls and short positions in puts.
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.
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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.