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The week kicks off with a nice bullish bounce in BTC from $69,000 to $72,500 (ETH to $3,600). Following last Monday’s bearish downturn to $64,500, uncertainty loomed regarding Bitcoin's short-term direction, leading to a spike in short-dated put implied volatilities. However, the recent uptick has shifted sentiment positively and revitalized bullish sentiment, evident in the now-positive short-dated skew. S&P futures showed similar price action last week, declining nearly $150 (~2.5%) from $5,330 to $5,190 before rebounding to $5,275 on Friday.
Another promising indicator for bulls is the expansion of the basis. Historically, funding/basis rates have been closely correlated with momentum, as evidenced by the recent move. Last week witnessed a significant contraction of the forward curve, with annualized rates dropping as low as 14%, only to rebound to over 20% this week. These rates reflect cash demand for leverage in the BTC market, serving as compensation for the sacrifice of upside potential. Specifically, traders who "short the basis" forgo upside potential by selling futures against spot long positions but earn the annualized basis at expiry in return. For large institutions or players seeking to mitigate directional risk, this trade is particularly appealing.
Implied volatilities have also risen across all expiries in both BTC and ETH option chains. Currently, short-dated vols hover around 75%, gradually climbing to 81% by March 2025 expiry for BTC. The term structure for ETH is similar, albeit with short-dated vols at 78%. Notably, volatility skew is now positive for all expiries, displaying an increasing term structure. This implies that as one looks toward further expiries, the relative overpricing of calls to puts intensifies.
This week, derivative volumes have slightly decreased for BTC and ETH. This was likely due to caution after last week’s price movement, as uncertainty in the market was palpable.
BTC Combo Spread Volumes:
ETH Combo Spread Volumes:
***Data and insights as of April 8th, 2024 12:00:00 UTC
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