Crypto Markets Daily Dec 23 2024

BTC Unmoved, ETH Unloved

The crypto market is still largely red and many crypto-assets are still in free fall following Chair Powell’s hawkish commentary last week. On Friday, BTC fell to the $93K level, then it rallied just shy of $100,000, and is now currently moving sideways in a similar fashion to some of its range bound price-action we saw earlier in the year (just now within a higher range).

The chart below visualises the relative price performance of some of the major cryptocurrencies which we have been following in previous commentaries, normalised to their pre-election levels on November 4th, with the FOMC meeting last week (Dec 18) also marked. This not only highlights the post-election exuberance and rally, but also more clearly showcases the drop across the board as Chair Powell forced traders to re-evaluate risk-on positionings.

When BTC falls, it drags the entire market with it and thus as we may have expected, Ethereum holders have been hit harder than their BTC counterparts. ETH is down approximately 15% on the week and so far today has been range bound within the $3.2-3.4K level. Derivatives markets continue to reflect the bearish sentiment too. We are firmly back in ETH’s vol premium mode as its ATM vols levels are higher than BTC at all tenors and ETH maintains its inverted term structure (see below).

Following on from last week’s poorer spot price action, ETH’s put-call skew ratio is more strongly bearish (2.06% in favour of puts compared to a more neutral 1.64% towards calls for BTC). 

Friday’s end of year expiry contract paints this difference in sentiment very clearly. Comparing the vol smiles of the expiration between today and yesterday we see that BTC’s smile is almost unmoved, while ETHs implied vol of calls has dropped significantly. BTC is pricing in a lower overall level of volatility, but vol levels of OTM BTC calls are still trading above puts despite their leak lower. End of year positioning therefore reflects a moderately less bullish picture than we saw going into December, but even more starkly for ETH than BTC.

The chart below shows that beyond the short-term horizon, traders still express positive sentiment for BTC – calls are trading at a premium to puts at tenors longer than a few weeks (see the blue and yellow line below).

It’s not just crypto and risk-on assets like equities that have reacted to the “new phase” in Fed policy. The long-end of the US Treasury yield curve has been selling off with 10Y yields rallying from 4.39% to 4.54%, their highest level in six months – largely a reaction to the upwardly revised inflation figures and the higher expected neutral rate. The 2Y yield rose from 4.23% to 4.37% after Powell’s comments, before now falling back to 4.33%. 

These moves together have resulted in a steepened 2s10s yield curve. As we approach President-elect Trump’s official inauguration in the new year, this sensitivity within treasury yields is likely to become even more apparent given the upside risk of a higher fiscal deficit and elevated inflation expectations.