Research Summary
The report provides a detailed analysis of the crypto derivatives market for the first week of January 2024. It focuses on the performance of Bitcoin (BTC) and Ethereum (ETH) futures and options, highlighting the impact of a swift spot market correction on leveraged long positions, futures-implied yields, and volatility term structures.
Key Takeaways
Spot Market Correction and Leveraged Long Positions
- Impact of Spot Market Correction: The report notes a swift spot market correction that led to a significant flush-out of leveraged long positions in both BTC and ETH. This resulted in futures prices collapsing towards spot prices, causing futures-implied yields to crash closer to zero.
Changes in Funding Rates
- Shift in Funding Rates: The consistently large and positive funding rate observed over the past month has moderated closer to zero. This is reflected in the BTC and ETH funding rates, which show a significant decrease following the spot market selloff.
Volatility Term Structures
- Volatility in BTC: The report highlights a strong inversion in BTC’s volatility term structure, with the 1-week tenor volatility exploding to 75%. This is in anticipation of the ETF announcement date in the next week.
- Contrasting Volatility in ETH: Unlike BTC, ETH’s term structure remains flat and at elevated levels for tenors longer than 1 week. The 1-week tenor has not exploded to the same level as BTC’s.
Options Market Performance
- BTC Options: Despite the selloff in spot prices, the report notes that vol smile skews remain slightly tilted towards calls across the term structure in the BTC options market.
- ETH Options: In contrast, the ETH options market shows a more pessimistic skew towards out-of-the-money (OTM) puts at short tenors.
Volatility Surface
- BTC Implied Vol Surface: The report highlights an extreme rally in short-term volatility in the BTC market, even compared to the pickup elsewhere on the surface.
- ETH Implied Vol Surface: The ETH market shows the strongest pickup in implied volatility across the smile at a 3-month tenor, indicating a rise in volatility across the surface.
Actionable Insights
- Monitor Market Volatility: Given the significant changes in volatility term structures for both BTC and ETH, investors should closely monitor market volatility. This could provide insights into potential market movements and inform investment strategies.
- Assess Impact of Market Corrections: The swift spot market correction has had a significant impact on leveraged long positions and futures-implied yields. Investors should assess the potential impact of future market corrections on their portfolios.
- Consider Funding Rate Changes: The shift in funding rates could have implications for the cost of holding positions in the crypto derivatives market. Investors should consider these changes when making investment decisions.
