Block Scholes x Bybit Crypto Derivatives August 28th

Key Insights

Futures: Activity in futures markets has remained muted during the sideways spot market price action, with the mid-August expiry of contracts seeing a small decrease in open interest as traders choose not to open new positions.

Perpetuals: ETH continues to price for a more bearish performance than BTC in the short term, with a more persistently negative funding rate over the past month. Altcoin performance remains mixed, while BTC shows some signs of recovery.

Options: The term structures of volatility for both BTC and ETH indicate a growing event risk premium around the US Presidential election date in early November, with longer-dated expiries pricing for higher volatility and a stronger skew towards OTM calls.

Block Scholes BTC Senti-Meter Index

Block Scholes ETH Senti-Meter Index

Block Scholes’ Senti-Meter index aggregates the funding rate, future-implied yield, and volatility smile skew into a single expression of sentiment in derivatives markets — see more in the methodology article here.

Macro, Tech & Regs

Macro Calendar & Recent Events

• U.S. Non-Farm Payrolls Report — Aug 2, 2024 — Employment figures were much weaker than expected, with unemployment rising to 4.3% and new jobs added at just 114K, compared to a median expectation of 175K, raising fears that the Fed has waited too long to cut rates.

• Bank of Japan — Jul 31, 2024 — The Bank of Japan hiked interest rates by 25bps, setting in motion the historically fast unwinding of global carry trades and a major spike in the VIX.

• US CPI YoY — Aug 14, 2024 — July Inflation numbers came in at 2.9% YoY, below expectations of 3.0%.

• FOMC Meeting Minutes — Aug 21, 2024 — Minutes regarding the July 31, 2024 meeting were released. The focus is on the reasoning behind holding rates at 5.25–5.50% and the possibility of a September cut

• Initial Jobless Claims — Aug 22, 2024 — An increase in jobless claims is expected at 232k compared to the prior figure of 227k

• Jackson Hole Economic Symposium — Aug 22–24, 2024 — The symposium will be closely watched for the Fed’s reaction to the market’s response to weak employment numbers on August 2, 2024.

BTC vs S&P 500 — A recovery following the Yen carry trade unwinding can be noted with S&P500 moving closer to pre-sell off levels compared to BTC spot

Institutional Adoption‍

• The number of institutional investors in BTC Spot ETFs has risen by 14% in the second quarter of 2024, despite BTC trading 16% below its all-time high as of August 21, 2024.
• Democratic presidential nominee Kamala Harris has not yet expressed her view on cryptocurrencies. Members of her campaign team have expressed conflicting points of view on digital currencies, and the DNC 92-page report was silent on the topic of crypto.

Futures Activity Remains Muted

The expiry of August 16, 2024 mid-month futures contracts saw a significant closure of futures contracts open interest, indicating that traders did not, in aggregate, choose to roll over many of their open positions to longer-dated contracts. Trade volumes in BTC contracts continue to dominate ETH’s in the period of calm following the selloff earlier in August, with August 19 marking an exception as we see traders open more positions in ETH as indicated by its uptick in open interest on that date.

Bybit Futures Swap Open Interest

Bybit Futures Trading Volumes

Perps See Seasonality On Sundays

The extended period of relatively low realized volatility in spot prices has had an expected impact on the activity in perpetual swaps. Trade volumes have been underwhelming in both BTC and ETH, while open interest has stubbornly refused to recover the near all-time high levels lost as traders closed positions in the sell off. We also see a weekly pattern emerge, with lower trade volumes recorded on Sundays, with an exception made during periods of incredibly high market volatility, indicating a seasonality in activity that is broken in periods of panic.

Bybit Perp BTC & ETH Open Interest — Open interest has climbed steadily, moving sideways in correspondence with spot prices.

Bybit Perp Trading Volumes — we routinely see the lowest trade volumes on Sundays and Mondays with a consistent high reached later in the week.

ETH Perps More Bearish Than BTC

Funding rates in ETH show a marked difference in sentiment when compared to the other major contract, BTC. While over the past month BTC has recorded a mostly positive funding rate, ETH has recorded a persistently negative rate, indicating that traders are willing to pay a funding fee to keep their leveraged short positions open. This matches similar indications of increased bearishness for ETH, especially in the short term, that have been expressed by options markets since the launch of the ETH Spot ETFs. Altcoin performance remains mixed, highlighting the lasting psychological impact of the selloff earlier in August.

Post-Election Expiries Hold a Stronger Skew Towards Calls

We have previously noted that options with shorter-dated expiries express a more bearish positioning. By plotting the volatility smiles at each listed expiry, we do indeed find evidence of more bullish positioning at tenors after the election. Options expiring on December 27, 2024 and June 27, 2025 hold a noticeably stronger skew towards OTM calls, when compared to a the more bearish skew towards OTM puts at expiries before the beginning of November. Moreover this is observable for both BTC and ETH options, indicating bullish positioning for the fortune of crypto-assets in general in the later part of 2024.

BTC Options

Volatility term structures have returned to a “normal” steep shape as a result of a swift fall in short-dated volatility following the just-as-swift collapse in realized volatility, but longer-dated tenors remain distinctly elevated. This indicates a possible event risk beginning to be priced in for the US Presidential election on November 5, 2024, which has emerged as one of the next big narratives that could catalyze price action in the near-term. Strangely, we do not see a similar event-risk premium priced in near to either Jackson Hole, at the end of August, or the FOMC meeting on September 12, 2024 -- both of which could dictate risky-asset performance in the even shorter term.

BYBIT BTC OPTIONS VOLUMES

BYBIT BTC OPTIONS OPEN INTEREST

Term Structures Price In US Election Event Risk

BYBIT BTC & ETH Volatility Term Structure — Short-tenor volatility has fallen swiftly with realized volatility, but longer-dated volatility has remained stable and high.

BYBIT BTC SVI ATM IMPLIED VOLATILITY — The steepening in the term structure is clear from the divergence of options expiring either side of the November 5 election date.

BYBIT BTC IMPLIED AND REALIZED VOLATILITY — Realized volatility has collapsed in the weeks since the selloff in early August as prices have traded sideways with little volatility.

ETH Options

ETH options have fared similarly to BTC’s with a steepening term structure and election risk-premium priced-in, but continue to hold the extra volatility premium at all tenors across the term structure. Open interest and daily trade volume remain (like their futures and perpetual swap counterparts) below that of BTC, indicating that the latter token remains the first-choice for bets centred around crypto-specific events. We expect this to continue throughout the election, especially given Trump’s embrace of Bitcoin by name.

BYBIT ETH OPTIONS VOLUMES

BYBIT ETH OPTIONS OPEN INTEREST

ETH Holds a Volatility Premium to BTC

BYBIT ETH VOLATILITY TERM STRUCTURE — ETH’s term structure has steepened significantly at the front end over the last week.

BYBIT ETH SVI ATM IMPLIED VOLATILITY — We see the same divergence around the November 5 election date growing in the term structure of volatility.

BYBIT ETH IMPLIED AND REALIZED VOLATILITY — ETH’s realized volatility levels have cratered to the levels implied by options during the sideways price action.

Volatility by Exchange

BTC, 1-Month Tenor, SVI Calibration

ETH, 1-Month Tenor, SVI Calibration

Bybit Volatility Surface

Listed Expiry Volatility Smiles