Crypto Markets Daily Dec 20 2024

It's Rough, in the Short Term

Another rough day for Crypto, as BTC spot is down -7.7% (24h) and continuing to slide lower following Wednesday’s hawkish macro news. A reflection of the spooked markets’ downfall continues as Polymarket odds for the “What price will Bitcoin hit in December?” market gets flipped. Bets on BTC reaching $110k or more fell from a peak of 87% just 3 days ago on Dec 17th, before Powell’s Fed conference, to a low of 17%. Alongside, probabilities for BTC dropping to 90k or below rises to 60%, an extremely bearish immediate outlook. This is another highlight of crypto’s volatility especially in the short term where a 10-20% change in spot can completely turn the odds of a fragile crypto sentiment.

However, the writing had been on the wall in derivatives markets. The pullback in spot prices had been telegraphed by first the slowdown, and then the crater lower in the derivatives metrics that we're tracking -- well before Powell put a lot of very cold water onto an already sputtering fire. Our aggregate of funding rates, volatility smile skew, and futures basis had telegraphed a pullback in spot prices from the beginning of December, largely as a function of the reset in derivatives leverage that we saw at that time.

While PCE this afternoon shows a "slower than expected" increase in prices, it comes a tad too little too late for risk-on assets, and has done little to lift the mood in crypto-derivatives. Sentiment in both BTC and ETH markets now moves sideways as spot struggles to do the same. Derivatives reflect the increasingly bearish sentiment with BTC front-end vols having moved up alongside the slide. This marks the first time for a while that we have seen a reactive front end during a selloff.

BTC ATM implied volatility now trades at a 12 point spread below ETH’s at a 1-month tenor. This aligns with spot moves as ETH has been hit harder and sharper by the pullback in sentiment, resulting in a retrace of much of the gains that it had made against BTC since the Gensler exit.

Markets are not bullish at short tenors whatsoever – implied volatility skew of both majors show a tilt towards puts, more pronounced in ETH. There is however a more positive long term sentiment, skew at longer tenors remains call heavy, indicates that some of the bearishness forecasted over the next few weeks is being compensated by longer-dated bullishness- traders see light at the end of the tunnel.

Although we believe that there are a multitude of reasons to be bullish longer term, particularly for the U.S. political scene, this isn’t playing a major role in the bearish short term view. For example, Trump’s pro-crypto cabinet picks are mostly known and priced in, and there is an uncomfortable wait before any legislation can be passed. Instead, the short term outlook has been dominated by markets being caught off-balance by the stickiness in inflation data and the Fed’s revised cutting program. 

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We’re ultimately seeing the effect of that across risk-on assets, including equities and crypto, expressed in spot, derivatives, and even (previously consistently strong) ETF inflows, which recorded $671.9M in outflows on Thursday alone. S&P 500 closed at -3% (24h) and the VIX index, a gauge of the market's expectation of S&P 500 index volatility, remains elevated after spiking up immediately after Wednesday’s news. This again indicates a rocky short term market expectation.