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The week opens with a bullish Bitcoin gunning past $48,000 and showing no signs of slowing down. BTC moved about 15% since last week’s commentary, while ETH only rose about 7%. This likely means that ETH is up next as flows tend to rotate in this market. Meanwhile, things are quiet on the TradFi front as SPY creeps around previously unseen prices of $500. With CPI numbers coming out and the market at all-time-highs, investors are rightfully cautious at these levels.
Annualized basis rates for both BTC and ETH have also witnessed significant expansion. Short-term basis is currently yielding around 14%, while mid and long-term basis yield approximately 10.5% - 13%. This yield is huge when compared to basis or bond yields in traditional financial markets. It highlights the considerable demand for cash liquidity in the crypto markets, given that the basis essentially represents a synthetic bond position. This is easy to see, as to earn the basis yield one must perform the same functions as when buying a bond. To short the basis the trader must outlay cash to purchase spot and subsequently hedge with a short futures position, offering leverage for the long holder on the other side. In essence, traders are being compensated for outlying physical cash and providing cash liquidity to the market, exactly the same as when buying a bond.
Coming over to the derivatives market, we see huge movement in implied vols this week in tandem with spot, again showing definitively positive spot - vol correlation. Volatility surfaces for both BTC and ETH showed massive shifts upwards, as well as tilting over to the call-side as vol skews pushed to even higher positive levels. It goes without saying calls, call spreads, and short diagonal / calendar spread holders got paid massively since last week, as front-end vols jumped about 10 points. Mid-term expires April 26th, June 28th, and Sep 27th moved from 46, 50.5 and 53.5 to 56.5, 59.7 and 60.45 respectively. As stated previously, long upside vol got paid handsomely, both on delta and vega. From this vol / price level it will be interesting to see how derivatives market players move next.
Given the current volatility and price levels, it remains intriguing to observe the next moves in the derivatives market. Will players continue to buy gamma, contributing to pushing spot prices beyond these levels, or will they opt to sell into these moves, potentially temporarily halting BTC's momentum at $48,000? The coming developments in the derivatives market will undoubtedly provide valuable insights into the evolving dynamics of the cryptocurrency market.
Combo spread volumes this week tilt back towards BTC. Put based spread dominance recedes and it seems as though its back to the regularly scheduled programming of call spreads and strangles/straddles. Because vols continue to trend lower one can safely assume that a good chunk of this volume, especially the strangles, was likely caused by vol sellers. As BTC / ETH feign momentum, vol sellers aim to earn yield by selling into these moves and collecting premium for correctly guessing that realized volatility dies down before breaking their strike level.
BTC Combo Spread Volumes:
ETH Combo Spread Volumes:
***Data and insights as of February 12th, 2024 12:00:00 UTC
***Data and insights as of February 12th, 2024 12:00:00 UTC
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