Beginning of a New Year Rally?

​​Crypto Market Week in Review (03 November, 2023)


The market was in a risk-on mode this week. Bond prices advanced due to lower-than-expected new issuance plans by the US government and a relatively dovish stance from the Federal Reserve. The Fed kept rates unchanged as expected and signaled that the hiking cycle may be over. The increase in Treasury yields over the last few months led to a tightening of financial conditions, effectively substituting for further rate hikes by the Fed. The S&P 500 index rallied almost 5% during the first four days of this week, marking a significant move. Given the very positive seasonal trends, it appears to be the start of a New Year rally.

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The oil price modestly decreased this week, but its volatility smile changed dramatically as low-delta, deep-out-of-the-money calls became slightly less expensive than the same-delta puts. In the chart below, the curve for this week (white) is either the same or slightly higher on the left side compared to symmetrical values on the right side. Conversely, the curve for last week (red) was heavily skewed to the right side. The lower part of the chart illustrates the difference in values between the white and red curves. The extreme bullish options skew observed following the onset of the Middle East conflict was completely erased this week, transitioning to a slightly bearish skew. The oil market seemingly stopped worrying about the Middle East conflict. We wonder if the volatility market is sure a broader war will be avoided or if it's explained by a rush to hedge among shale oil producers (i.e., buying puts to secure relatively high oil prices).

WTI oil volatility smile

WTI oil volatility smile
Source: Bloomberg

Crypto prices stabilized following the rally last week. From the close last Friday to this Friday morning, Bitcoin rose by about 2%, while Ethereum increased by 1%, continuing to underperform Bitcoin. Solana rallied by 23%, reaching its highest level since August 2022.

Bloomberg reported a significant inflow into crypto exchange-traded products last week, likely contributing to the substantial rally. Bitcoin funds received as much as $326 million, marking the largest inflow since last August, but it was only the 21st largest on record, indicating continued restraint among investors.

Crypto implied volatility, as measured by the DVOL indexes, edged higher following the rally last week, largely mirroring spot price movements. Ethereum's implied volatility remained lower than Bitcoin's. Open interest in Bitcoin options recovered about half of the recent drop due to expiration, suggesting a continued strong demand for volatility. Call options usually dominate trading on Deribit, with the $40,000 call now being the most popular Bitcoin option by far.

Bitcoin options open interest by strike price

Bitcoin options open interest by strike price
Source: Deribit

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