Crypto Volatility: A Volatile Summer

An Eventful Summer

After several months of range bound price action, this summer has been so far full of critical events for crypto. The recent BTC Nashville conference, the announcement of former president Donald Trump as guest speaker, the unsuccessful assassination attempt, and his subsequent emergence as front-runner in November’s election have had a major impact and increase in overall volatility. More significantly, BTC volatility saw a steeper surge in demand compared to ETH options towards the end of July, reaching the highest levels of implied volatility since the end of April, as shown in Figure 2 and 3.

In addition to this, August has not been short of significant events that shaped the dynamics of spot and volatility movements. After a stark interest rate hike imposed by the Bank of Japan, and the following appreciation in the value of JPY, traders have been forced to close carry trades involving the currency. This factor, combined with the release of unfavourable statistics regarding US employment that raise fears of a possible recession, has generated panic in the equities markets leading to a massive selloff not seen since COVID. The turbulent and sudden crash has not spared crypto, causing a sharp drop in prices followed by a fast but mild rebound. Volatility has been massively impacted and reached new highs especially for ETH options, effectively undoing the relative surge that BTC volatility had at the end of July, and both currencies’ volatility are now showing steady levels of sideways movements

Volatility Movements

The July US election narrative coincided with the final approval and the trading commencement of the ETH spot ETFs, which did not have the same positive impact on ETH spot and volatility in the same way that the initial approval of ETH’s ETFs did in May, as shown in the charts below. ETH spot has in fact now suffered greatly after the launch of the ETF, similarly to how BTC prices fell after the release of the respective ETF. Moreover, ETH spot has further dropped more relatively to BTC after the sudden sell-off witnessed on August 4th, while volatility was trading at a premium compared to BTC.

The new ETF has registered daily outflows as seen in Table 1, which similarly happened in January after the release of the spot BTC ETFs, as seen in Table 2. We can notice that the daily outflows are much smaller than the estimated $16B daily trading volume for ETH and it is not expected to influence prices greatly; however it has affected sentiment and expectations regarding the new security and the currency.

In fact, since the ETH ETF was initially announced in May, implied volatility for ETH options across all tenors traded at a premium to BTC options. This is surprising as the respective levels of volatility in BTC and ETH have not shown such accentuated spreads recently, as shown in Figure 5 and 6. This outlook towards ETH however seemed to have reversed with the trading commencement of the ETF, as implied volatility for BTC derivatives finally caught up with ETH volatility premia and slowly started to fall again, similarly to the first ETF launch in January. However, after the big sell-off in August, the volatility levels of ETH are showing significant higher levels again.

This overtake in option premia in favour of ETH is particularly surprising as it marked the end of a long period of higher or equal volatility levels for BTC, which started in March 2023 as seen in the chart below. Despite a quickly outlived sudden rise for BTC ATM options around the ETH ETF trading commencement date, July’s move in favour of ETH marked a return to higher volatility for ETH options, which has been the case for much of the historical data since 2020.

Oscillating Sentiment

At the same time we see a similar switch in behaviour in the skew of each coin’s volatility smiles. ETH skew indicated a preference for OTM calls immediately after the announcement of the ETF in May, while BTC expressed a volatility premium for put options for BTC. This indicates that traders were seeking more bullish positioning in ETH than in BTC in anticipation of the release of the ETF.

The excess bullishness expressed by ETH’s skew towards calls continued until the assassination attempt on July 13, 2024, after which point the trend reversed, showing that BTC swiftly shifted from a neutral sentiment to higher premium towards calls. The attack on Trump has been interpreted as a defining moment for his run for presidency, as many think that his chances of winning soared (see article). In combination with his enthusiastic outlook on crypto, market sentiment towards BTC reacted more swiftly than it did for ETH. This sudden BTC sentiment frenzy seems to have subsided after the trading start date for the ETH ETFs and the end of the BTC Nashville conference.

It is worth noting that these periods of more positive sentiment for ETH options are generally uncommon historically, especially for such prolonged periods of time like between May and July this year. This has been highlighted in Figure 8, where we show the difference between the skew levels of BTC and ETH options from January 2022. As we can see from the spread, BTC has generally shown more bullish (or less bearish) sentiment, and the last time the reverse occurred for a significant period of time dates back to July 2022 and to the trading commencement date of the BTC ETF.

Despite these recent periods of high volatility and sudden price movements, longer-tenor skews indicates different longer-run market expectations for BTC and ETH. From the charts below we can notice how longer tenors are still skewed more towards calls despite the sudden drops in the recent weeks. This can imply that long-term sentiment is still positive expecting a rebound after the recent spot drops for both coins. However, market sentiment is still hesitant for the short term, showing a strong skew towards puts for shorter tenors while volatility has settled above July’s levels.

We therefore have already observed a large number of volatile macro events this summer. While it is possible to draw parallels between the effect that the two ETF launches had on positioning in options markets it is worth highlighting the very different political and macro conditions under which they took place. Trump’s talk at the Bitcoin conference in Nashville represented a pivotal moment for cryptocurrencies and their entanglement with politics: crypto has emerged as a key political issue that distinguishes the two candidates, and the surge in BTC implied volatility after the Pennsylvania events could reflect newly opened positions and strong bullish sentiment. In addition to the events in July, the equity market showing sign of extreme negative sentiment and panic after the BoJ decision on interest rates and release of statistics on US economy, was clearly also felt in the crypto world, with sharp drops and sudden rise in volatility. These swift changes in sentiment observed between BTC and ETH have likely been exacerbated even more by the current political and economic landscape, which happens concurrently to the race for the White House, which will bring more exciting developments in volatility and spot prices dynamics.