Crypto Volatility: A Tale of Two ETFs

Not If, But When?

In January 2024, after months of buildup, speculation, and levered up markets, the SEC approved 9 (and converted 1) spot BTC ETFs in the US. Each began trading just a day later, resulting in the fastest ETF launch to hit the $10B asset mark in history. On May 23rd, after a dramatic reversal in its likelihood just two days prior, the SEC approved the same for spot ETH ETFs.

ETH’s spot price immediately reversed a sizeable chunk of its underperformance against BTC with a +20% candle, as shown in the chart below – this sudden announcement was a world away from the build-up ahead of BTC’s which saw a slow-burn rally of 60% over a period of 3 months.

However, May’s approval was for just one of the two filings necessary to begin trading (the “19b-4”). The second form (the “S-1”) has at least one more round after a July 8th deadline for review. As a result, this round of uncertainty is of a very different nature to that which preceded BTC’s approval in January. Then, it was uncertain whether the process would be approved at all (despite the prevailing bullishness). Now, the question is not if, but when?

Volatility Now and Volatility Then

Ahead of BTC’s ETF announcement we had a date to look forward to – 9th January – a date by which the market expected a final decision from the SEC to result in either an approval or a rejection of the 9 ETF applications.

This resulted in a dislocation in volatility expectations that moved along the term structure as the date drew closer. Options expiring before the deadline traded with a significant volatility premium to those after (as shown by the gap that opened up between the 30D and 90D tenors in the chart below) that culminated in a big deleveraging event (as shown by the big spike in vols at the beginning of July).

With a sudden approval already passed, and no clear deadline for the beginning of trading to watch, we’ve not seen the same behaviour in ETH vol markets this time around. Instead, we saw a large spike in volatility following the approval of 19b-4 forms at the end of May that quickly subsided. Following the move, longer-dated options priced in a higher level of volatility for the rest of the year, but short-dated vols returned to their pre-spike levels just days later.

We also saw a cross-market dislocation between ETH volatility and BTC volatility levels – one we did not observe in reverse during BTC’s pre-approval mania. Then, the market priced ETH volatility at a very similar level to BTC throughout the approval process, expressing a pan-crypto bullishness on the back of the influx of institutional interest. ETH was swept up alongside BTC, albeit with a persistent under-performance in spot price which we noted at the time.

This time around, ETH volatility trades with more than a 10 point premium across the term structure, with ETH vols at shorter tenors the furthest above their BTC counter-parts. While the ETH vol premium is not new and has been regrowing steadily after disappearing in Summer 2023, the extremity of today’s dislocation can be correlated with the ETF move in May.

This dislocation makes some sense to us – the approval of a spot BTC ETF in January paved the way for institutional adoption of crypto full-stop, and we should expect at least some of the probability of the approval of ETFs settling to other crypto-asset to be have been priced in by its approval.

Co-Skewed

To match the dislocation in outright vol levels, we also see a marked premium for ETH calls in its 1 month tenor risk-reversal. In contrast, BTC’s smiles have skewed slightly towards puts at shorter tenors. As with the dislocation in vol, the dislocation between BTC and ETH skew is stronger for short dated options but does not target a specific expiry given the lack of clarity on start-of-trading date.

The dislocation grew to its current levels after BTC underperformed in the mid-July selloff in spot prices. In the period between the announcement and the selloff, BTC traded with a lighter call skew that occasionally matched ETH’s bullish levels at 5% (at a 1 month tenor).

However, comparing the dislocation in the 30D tenor with the respective levels of skews at a shorter tenor of 5 days indicates that the market is pricing in a premium to ETH calls for some date near to the beginning of July -- ETH 30D calls were lifted above BTC’s much earlier than the 5D tenor calls, whose  jumped above BTC’s 5D tenor skew at the end of June.

ETH’s promise of an ETF-rally was enough to sustain its bullish sentiment through a broader headwind that saw BTC suffer. With a BTC ETF already locked in, and without a clear deadline date to target, ETH markets are pricing in a volatility premium across the term structure that is expressed as a significant premium assigned to upside volatility in expectation of a repeat of BTC’s record-busting ETF launch.