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The previous week of price action in Bitcoin can be characterized by recovery from sub $40,000 levels. A steady trend up to $40K could be observed until last Friday, when much stronger momentum upwards ensued, pushing BTC past $40,000 all the way up to $42,500. Ethereum mirrored similar movement, but with significantly less momentum, only showing a 5% move (half of BTC’s weekly return) from last week's lows of $2,180. However, analyzing higher time frame candles (4H - 1D) indicates that this observed movement in crypto doesn't yet signify definitive bullish momentum, as price encounters significant resistance at these levels. For a true bullish signal on higher time frames, BTC would need to demonstrate a clear break above $43,500.
On an annualized basis, funding rates in the crypto market have decreased, and the basis curves now exhibit a relatively flat term structure, with rates ranging between 7% and 9% (depending on maturity and venue). This holds significance not just in terms of return on the basis trade but also because futures' annualized basis tends to exhibit a strong positive correlation with longer-term price trends. This correlation arises due to the crypto market's sensitivity to sentiment, where demand for liquidity and leverage is influenced by market sentiment. Despite the recent bounce, basis/funding rates haven't returned to previously observed levels of 10% to 15%. These annualized rates are also inherently linked to options volatility skew for a simple reason—skew is correlated with market direction, just like the basis. Although the basis has not yet rebounded, volatility skew is showing signs of returning to positive territory, especially for short to mid-term expiries.
At-the-money implied volatility continues to decrease in both BTC and ETH, particularly in front-end (shorter-dated) vols. ATM IVs for major expiries on Mar 29, Jun 28, and Sep 27 currently stand at 44.6, 51.25, and 53.67 (a drop of about 1.5 to 2 points since last week). Examining the term structure graphs reveals that the movement in vols since last week is much more prevalent in shorter expiries (comparing the current Mark IV and last week's Mark IV - the Shadow mark IV). This suggests that more volatility is being sold in the front-end than in the back. With the term structure becoming steeper, calendar-based volatility spreads become attractive. Properly executed, this strategy can capture profits resulting from the term structure's slope flattening and reverting back to "normal" levels.
In summary, the market shows healthy activity, and an increase in realized volatility is a positive sign. Whether BTC successfully rebounded from $38,000 and avoids revisiting the low to mid-$30,000 levels remains uncertain. However, this morning the market displays a continuation of bullish momentum, and if it can push another $500 to $1,000, it would serve as a strong indicator of higher time frame momentum.
Combo spread volumes this week show significantly higher relative volume in ETH than BTC. The mix of combo spreads also deviates from the expected mix normally observed, as more put based spread positions are evident. This is significant as it shows that weekly concentrations of options exposure have definitively shifted towards downside based vol.
BTC Combo Spread Volumes:
ETH Combo Spread Volumes:
***Data and insights as of January 29th, 2024 12:00:00 UTC
***Data and insights as of January 29th, 2024 12:00:00 UTC
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