Block Scholes x Bybit Crypto Derivatives December 12th

Key Insights

BTC and ETH’s oscillating spot levels over the last week below psychological price targets have left their mark on derivatives markets. A pullback in spot price was exacerbated by a spate of liquidations of over-leveraged long positions in perpetual swaps markets. The aftermath sees a fall in open interest in the instruments, particularly in ETH markets, and a reset of previously overheated funding rates to much lower (but still positive) levels across the board.

Futures: Open interest in futures contracts is still below pre-November expiration levels. Open positions are now concentrated in December’s end-of-year expiration contract.

Perpetuals: Extremely high funding rates have been reset across the market following a liquidation spree that exacerbated a pullback in spot prices.

Options: ETH’s term structure remains inverted, in contrast to BTC’s flat shape, as realized volatility is climbing above forward-looking volatility expectations for only the second time since late September.

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. Nonfarm Payroll — Dec 6, 2024 — NFP data showed the U.S. economy added 227,000 jobs in November against expectations of 220,000, signaling a still resilient economy.
• China Politburo Announcement — Dec 10, 2024 — Chinese policymakers have changed their monetary policy stance from “prudent” to “moderately loose” for the first time in 14 years, and have suggested larger monetary and fiscal policy will be implemented.‍
• Bank of Canada Interest Rate Decision — Dec 11, 2024 — Following a larger-than-expected uptick in the Canadian unemployment rate, Bank of Canada is expected to cut interest rates by 50 bps.
• U.S. CPI — Dec 11, 2024 — U.S. Consumer Price Index data showed core inflation rose at 3.3% year-over-year (YoY) for the fourth consecutive month, while the headline inflation figure rose 2.7% YoY in November. Confirmation of the market's expectations has increased the probability of a 25 bps cut by the Federal Reserve next week.
• ECB Monetary Policy Decision — Dec 12, 2024 — The ECB is widely expected to cut interest rates by 25 bps amid political uncertainty, weakened growth in its key economies and inflation slightly ticking up to 2.3% in November from 2% in October.

BTC Spot & Gold Prices — BTC’s spot price rallied following the Nov 5, 2024 U.S. election, while gold prices fell. However, these trends have reversed over the past week.

Trending News

• Microsoft shareholders voted against the proposal of allocating 1% of the company’s $78B in cash reserves to Bitcoin in what would have been another major tailwind for the mainstream adoption of BTC.
• Ripple Labs’ U.S. dollar–backed stablecoin (RLUSD) has received approval from the New York State Department of Financial Services (NYDFS).

Futures Open Interest Still Lower

ETH futures contracts haven’t seen the same fall in open interest as ETH’s perpetual swaps contracts during the brief halt in upward spot price momentum. Instead, we see evidence of an increase in positioning for both BTC and ETH positions. However, the size of open positions has still not recovered from the expiration of around $20M of contracts at the end of November 2024. This indicates that those traders who held November-end contracts have still not re-entered the market in the same volume of contracts. As is normal, the December end-of-year contract currently holds the largest open interest, though we may see this change similar to observations from November’s expiration.

Bybit Futures Swap Open Interest

Bybit Futures Trading Volumes

ETH Perp Positions Closed

The rush to open ETH perpetuals positions that drove much of the increase in open interest that we saw this past week has been reversed. As this corresponds to a sudden drop in funding rates for the contract, we speculate that this was the result of the liquidation of overleveraged long positions. Interestingly, despite a similar fall in the funding rate charged for its long positions, activity in BTC perpetual contracts has remained largely unchanged throughout December 2024, spiking higher during BTC spot price’s forays above the $100K mark.

Bybit Perp BTC & ETH Open Interest — Open interest has fallen lower during spot’s sideways movement, mainly as a result of the closure of ETH positions.

Bybit Perp Trading Volumes — Weekday trade volumes have been consistently high in both BTC and ETH since the U.S. elections, despite faltering upward momentum.

Funding Rates Reset

The persistent and exuberant funding rates in almost all perpetual markets that we commented on in last week’s analysis have dissipated, following a significant liquidation of heavily leveraged long exposure. However, while indicating much lower levels of bullish positioning, funding rates have not collapsed to significantly negative levels in the aftermath of the flash sell-off, and are currently trading sideways. This is indicative of a reset in leveraged exposure, commonly observed when expectations of further spot rallies become overheated.

BTC Options

Repeated rejections of BTC spot levels above $100K have seen Bitcoin’s price oscillate with increased realized volatility in its current range. After the term structure inverted several times in November 2024 with spot rallies, implied volatility levels are now slightly lower at short tenors following sideways price action. As a result, recently delivered volatility levels are trading above forward-looking expectations for only the second time since late September. Demand for optionality is expressed nearly equally in the open interest of puts and calls, as BTC’s spot price awaits a further bullish catalyst.

BYBIT BTC OPTIONS VOLUMES

BYBIT BTC OPTIONS OPEN INTEREST

BTC Realized Volatility Climbs

BYBIT BTC & ETH VOLATILITY TERM STRUCTURE — While not fully inverted, the front end of the term structure is still unusually flat following recent spot price action.

BYBIT BTC SVI ATM IMPLIED VOLATILITY — BTC’s term structure appears far from inverted since rejecting super-$100K levels, in contrast to ETH’s term structure shape.

BYBIT BTC IMPLIED AND REALIZED VOLATILITY — BTC realized volatility has risen above the level of short-tenor implied volatility.

ETH Options

In contrast to the balanced levels in BTC options markets, ETH’s open interest is still skewed toward bullish calls, the majority of which have December 2024 end-of-year expiration. However, volumes have been lower during the recent period of sideways spot price action. The volatility term structure is still inverted because longer-dated volatility expectations have remained pinned to the 70% level, as shorter-dated expirations have ranged reactively to movements in spot price in the fallout from the U.S. elections.

BYBIT ETH OPTIONS VOLUMES

BYBIT ETH OPTIONS OPEN INTEREST

Realized Volatility Climbs Higher

BYBIT ETH VOLATILITY TERM STRUCTURE — The term structure is sharply inverted at the front end, with flatness in the back half of the curve.

BYBIT ETH VOLATILITY TERM STRUCTURE — The term structure is sharply inverted at the front end, with flatness in the back half of the curve.

BYBIT ETH IMPLIED AND REALIZED VOLATILITY — Realized volatility has climbed back above levels implied by 30-day tenor options.

Volatility by Exchange

BTC, 1-MONTH TENOR, SVI CALIBRATION

ETH, 1-MONTH TENOR, SVI CALIBRATION

Bybit Volatility Surface

Listed Expiration Volatility Smiles