Research Summary
The report provides a comprehensive analysis of the crypto derivatives market, focusing on volatility levels, futures yields, and funding rates. It also examines the performance of Bitcoin (BTC) and Ethereum (ETH) in terms of annualized yields, implied volatility, and risk reversal. The report further explores the volatility surface and smile calibrations for both cryptocurrencies.
Key Takeaways
Volatility Levels and Futures Yields
- Decreasing Volatility: The report notes a continued decrease in volatility levels for both BTC and ETH, a trend that began after the resolution of the ETF event risk in early January. This decrease is more pronounced for out-of-the-money (OTM) puts than for OTM calls, resulting in a shift in volatility smiles towards OTM calls.
- Rising Futures Yields: Futures yields have increased after a period of stability. This rise indicates a return of bullish sentiment, which was last seen in late January.
Annualized Yields and Funding Rates
- Recovery in Annualized Yields: Short tenor future prices for BTC have risen over the last 24 hours, after remaining between 5% and 10% for most of the week. ETH shows a more dramatic recovery in short-tenor yields, which had reached closer to 0% mid-week.
- Increased Funding Rates: The funding rate for BTC has steadily increased over the last 24 hours, indicating a significant increase in demand for long exposure in the USD contract. The ETH funding rate also shows an elevated rate paid from long positions to shorts, coinciding with a rally in the spot price.
Implied Volatility and Risk Reversal
- Stable Implied Volatility: Despite a sharp increase in BTC spot over the last 24 hours, implied volatility continues to trade sideways. ETH has traded at similar levels to BTC over the last week.
- Resolved Risk Reversal: The bearish skew towards puts observed following the ETF has now resolved across the term structure for BTC. ETH reports a neutral shape to the volatility smiles at 1-week and 1-month tenors, with a more bullish tilt at 3-months.
Volatility Surface and Smile Calibrations
- Decreased Volatility Across the Surface: Over the last month, volatility has cooled across the surface for BTC, with OTM calls outperforming. ETH shows a similar trend, with OTM call vols outperforming puts, resulting in a bullish shift in skew.
- Smile Calibrations: The report provides detailed BTC and ETH smile calibrations for the 23-Feb-2024 expiry, indicating the distribution of implied volatility of an option at a given delta and tenor over the previous 30-days.
Actionable Insights
- Monitor Volatility Trends: Given the continued decrease in volatility levels for both BTC and ETH, investors should keep a close eye on these trends as they could impact the risk and return profile of crypto derivatives.
- Assess the Impact of Futures Yields: The rise in futures yields could indicate a return of bullish sentiment in the market. Investors should assess the potential impact of this trend on their investment strategies.
- Consider Funding Rates: The increase in funding rates for BTC and ETH suggests a significant increase in demand for long exposure. Investors should consider these rates when making investment decisions in the crypto derivatives market.
