Block Scholes x Bybit Crypto Derivatives January 10th 2025

Key Insights

The new year has brought with it a new visit above $100K for BTC. However, it was short lived as macro data challenged the need for a sustained pace of US interest rate cuts. The JOLTS Report revealed 8.1M job openings in November, the highest in six months, while December’s ISM Services Index showed a 6-point rise in services and materials prices, heightening inflation risks. Slower rate cuts negatively affect risk-assets which perform better in greater liquidity conditions. Additionally, derivatives market sentiment hadn’t supported the move above $100K in the same manner that it had the first two times. Realized crypto volatility at the end of December 2024 was strikingly low, 20 points below  implied volatility of one-month tenor BTC options which marks the largest premium of forward-looking volatility since the U.S. elections, despite no clear event risk. Longer-tenor options reflect a bullish skew towards calls.‍

Perpetuals: Lower trade volumes over the past week have likely played a part in the collapse of realized volatility, but open interest levels have remained stable.

Options: Despite the steep shape of the volatility term structure, shorter-tenor implied volatility is still trading at a significantly higher level than the level of realized volatility over the past week.

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 ‍

• Euro Area Inflation — Jan 7, 2025 — The Euro Area flash inflation estimate showed that headline inflation was expected to rise to 2.4% in December 2024, and core inflation at 2.7%. This is in line with expectations, and is most likely due to higher energy prices.‍

• U.S. JOLTS Report — Jan 7, 2025 — The JOLTS report released by the Bureau of Labor Statistics (BLS) showed signs of a stronger-than-expected labor market, with the number of job openings in November coming in at a 6-month high of 8.098 million, exceeding all estimates. 

• U.S. Services ISM Index — Jan, 07, 2025 — December’s Institute for Supply Management^® (ISM) Purchasing Manager’s Index^® (PMI) increased to 54.1 percent, its highest reading since 2023. Given the importance of services for the U.S. economy, this again indicates continued resilience. However, the price index for services rose by 6 points to 64.4, indicating inflationary pressures.

• China CPI — Jan, 09, 2025 — Inflation data for China is expected this Thursday. November’s reading showed a year-over-year rate of 0.2%, suggesting the economy is still struggling with deflationary pressures.

• U.S. Nonfarm Payrolls — Jan, 10, 2025 — The U.S. Nonfarm Payroll Report due Friday is expected to show the U.S. economy added 160,000 jobs in December 2024. If this figure surprises significantly to the upside, given the market reaction to the JOLTS report, we can expect more volatility to the downside.

Interest Rate Differential — The spread between 10-year U.S. Treasuries and 10-year Chinese Treasuries has been widening. U.S. yields have been increasing toward the 5% level, while Chinese yields have been falling toward 1%.

Trending News

• MicroStrategy announced its 21/21 plans to fund further Bitcoin purchases with the issuance of up to $2 billion in perpetual preferred stock. For the stockholder, perpetual preferred stocks provide fixed dividends, but feature no maturity date or voting rights.
• Ripple is collaborating with Chainlink to provide Ripple USD (RLUSD) price feeds on Ethereum and XRP Ledger, with the aim of driving broader adoption of the RLUSD stablecoin.

Lower Trade Volumes, Lower Volatility

Perpetual swap markets have felt the same drop in liquidity as many traditional finance asset classes over the winter break, seeing far lower trading volumes not only on weekends and public holidays but throughout the end of December as well. As we’ve previously observed, lower trade volumes tend to correspond with far lower levels of volatility in spot prices. This is precisely what we’ve seen delivered over this winter break, with realized volatility reflecting the lower levels of trading activity. Open interest levels remain consistent with pre-December expiration levels, indicating a lack of significant hedging activity in perpetual swap markets.

Bybit Perp BTC & ETH Open Interest — Early-year spot price action has seen an increase in open interest, despite a lower level of trade volumes.

Bybit Perp Trading Volumes — Trade volumes have been lower, not just on public holidays, but across the full winter break period.

Falling Funding Rates

The week began with positive funding rates across all perpetual swap markets, as BTC spot led a charge back above $100K on the back of two consecutive trading days of nearly $1B in ETF inflows each. However, Tuesday’s JOLTS report quickly threw cold water over risk-on assets. The leg lower in spot prices — markets are still feeling the fallout — has seen a sharp reversal in sentiment. However, the contrast with the liquidation event in early December that last saw funding rates turn negative indicates a far lower level of leverage built up in the system this time around, as traders have been far more wary of Bitcoin’s latest move above $100K.

BTC Options

Whereas positioning in ETH’s options markets reflects a preference for call options, open interest data in BTC markets is far more balanced following the expiration of December’s end-of-year contracts. Like ETH, BTC’s term structure has steepened into the new year. However, this is due to both a fall in short-tenor volatility levels (that match the crater lower in realized volatility) and a moderate increase in volatility at further expirations. The gap in implied volatility above realized volatility is at its largest since the U.S. election, with the 30-day implied at-the-money implied volatility level more than 1.5x the level of 7-day realized volatility.

BYBIT BTC OPTIONS VOLUMES

BYBIT BTC OPTIONS OPEN INTEREST

BTC’s Term Structure Steepens Further

BYBIT BTC ATM TERM STRUCTURE — Term structure has steepened as a rise in longer-tenor implied volumes is matched by a fall at the front end.

BYBIT BTC SVI ATM IMPLIED VOLATILITY — A rise in longer-tenor implied volatility levels has increased the steepness of the term structure alongside a fall at the front end.

BYBIT BTC IMPLIED AND REALIZED VOLATILITY — A fall in realized volatility has opened up the largest gap with implied volatility levels since just before the U.S. elections.

ETH Options

Activity in put contracts continues to dominate ETH’s options trading volumes, although traders have opened up a larger number of call contracts since December’s large expiration event. A previously priced-in bullish outlook, seen in the call dominated open interest, has given way to more frequent activity in puts contracts as spot fails to maintain upward momentum. However, the new year has brought with it a far lower level of realized volatility. While options traders have responded by pricing in a steepening of the volatility term structure, short-tenor volatility levels haven’t fallen, and remain more than 15 points (at a 30-day tenor) above realized volatility. We haven’t seen this size of divergence since these levels immediately pre-election, when the volatility premium could be attributed to the political uncertainty priced in ahead of the event. Now, without an event to pin it on, it appears that traders are pricing in a potential spike in volatility that could occur at any time.

BYBIT ETH OPTIONS VOLUMES

BYBIT ETH OPTIONS OPEN INTEREST

Realized Volatility Falls to Lowest Levels Since July 2024

BYBIT ETH VOLATILITY TERM STRUCTURE — The term structure is slightly higher than last week, but remains steep.

BYBIT ETH SVI ATM IMPLIED VOLATILITY — While a step down in spot prices has spiked short-tenor implied volatility levels, these levels remain far below their December highs.

BYBIT ETH IMPLIED AND REALIZED VOLATILITY — Realized volatility fell as low as 37% on Jan 7, 2025, its lowest level since July 2024.

Volatility by Exchange

BTC, 1-MONTH TENOR, SVI CALIBRATION

ETH, 1-MONTH TENOR, SVI CALIBRATION

Bybit Volatility Surfaces

Constant Maturity Smiles