Crypto Markets Daily Dec 6 2024

BTC Takes a Breather

Crypto’s capability for volatility has been proven to all new market participants over the last two days. After steaming through $100K early yesterday morning, BTC was unable to hold that level for long and fell throughout most of the evening. Then, around 10PM UTC, BTC experienced a flash crash from $98K to $93K. 

Throughout the post-election charge we have been highlighting that futures yields are stubbornly high and a large increase in perps open interest corresponded to a persistently positive funding rate demanded of long positions. Whereas yesterday’s daily comment highlighted the rapid increase in BTC’s funding rate (though we said it was still not as high as March’s peak), today's comment highlights a rapid crash to the first negative funding rates that we have seen since August.

We expect that this is the result of some liquidations, as indicated by the following chart which shows the open interest for BTC and ETH perps on Deribit. The relatively steep drop in BTC OI suggests some leveraged positions did indeed get flushed out, though just as the negative funding rate was not sustained for long, the fall in OI was not incredibly deep – particularly compared to the 26-27th Nov move.

At-the-money implied volatility shows a similar picture – vol levels skyrocketed on the way up and stayed inverted, before steepening again as spot retraced. This has resulted in a once again steep term structure, continuing the spot-inversion relationship that we have covered before here.

Whilst perp funding hit sub-zero, volatility smile skew did not turn negative. But, as the chart below highlights, skew at short tenors did dip significantly from their extreme bullish levels.

The reason why is familiar, and the 1-week volatility smile displays the story clearly. Volatility levels were lower across the board initially, then as price spiked upwards IV for calls was lifted by over 15 percentage points. As spot price then dipped back below $100K, volatility levels for puts rose to match that of calls, but the implied volatility of calls did not fall back down, indicating that while traders expressed demand for downside protection, they were not also giving up upside positions in size.

In contrast, implied vol levels for ETH have compressed slightly (see the chart below) and skew for ETH is still significantly leaned towards calls across all tenors. Spot ETFs mirror the contrast against BTC too – while BTC Spot ETFs had a great day despite the price action, netting inflows of $766.7M, ETH Spot ETFs had their best ever performance since launch with inflows of $428.5M; significantly above the previous high on 29 Nov of $332.9M.

We started the week by noting that it was an important one for macro data, and this afternoon’s mixed NFP report justifies that claim. The U.S. economy added 227,000 new jobs in November (above expectations of 200k-220k) and the no-show October figure was revised up to 36k from 12k. It appears the market hasn’t reacted to this data as much as it has to the household survey part of the report. This showed the unemployment rate tick up to 4.2%, after remaining still at 4.1% for the past two months. 

November’s FOMC meeting minutes emphasised the importance of following the longer-held trend rather than reacting to a single data point. If we combine the unemployment rate increase in today’s report with recent weakness in weekly jobless claims data, and the drop in hiring rate to its lowest since June indicated by the JOLTS report, the trend likely all but confirms a rate cut for December. 

Indeed, communications from several Fed speakers this week appeared to support a cut for this meeting and a potential pause in January. The market is certainly respecting this narrative too – implied-odds for a 25bps cut in December shot up from 68.5% earlier today to 91%, before now settling at 87.3%.