OTC Desk Market Update | Bitcoin at $100K — What’s Driving the Rally Amid Global Uncertainty?
Welcome back to our weekly market update! Here are the top things we’ll be paying attention to this week:
- Wednesday, December 11 — U.S. CPI Inflation Data
- Wednesday, December 11 — Bank of Canada Interest Rate Decision
- Thursday, December 12 — European Central Bank Interest Rate Decision
Macro Update
United States (U.S.)
New Home Sales Sputter
The October New Home Sales report showed a 17.5% decline in transactions, the worst figure since the Global Financial Crisis. This marks the 6th time in the past 8 months that monthly new home sales have dropped. Further, the supply of new-built homes nationwide rose from 7.7 months of inventory to 9.5 months, meaning that buyers have plenty of choice in the market.
Housing data like this is important because shelter prices account for 40% of the Consumer Price Index (CPI). Therefore, if real estate prices and rents begin to move lower due to a glut of available supply, this could put downward pressure on headline inflation going forward.
Labor Reports Meet Expectations, But Data Revisions Cause Concern
The major data influencing markets last week was regarding the U.S. labor market. First, the Job Openings and Labor Turnover Survey (JOLTS) showed a figure of 7.74 million open jobs nationwide, well above the consensus of 7.52 million, suggesting many available positions for unemployed workers to move into. Then, the ADP employment report showed a slightly weak figure of 146,000 new jobs created in November, versus estimates of 165,000. Finally, the Nonfarm Payrolls Report showed an increase in 227,000 new jobs in November, soothing concerns after October’s report showed just 12,000 new jobs. The markets had been expecting an even 200,000 new jobs, so this report beat expectations handily.
The one cause for concern is that the Bureau of Labor Statistics (BLS) began its process of adjusting the annual Nonfarm Payrolls data, and their preliminary estimate showed that the actual number of new jobs created throughout 2024 is likely 668,000 jobs fewer than initially reported. If confirmed, this would mean that employment was significantly weaker than expected, which could make the case for even looser monetary policy.
After the release of last week’s employment reports, the markets are pricing in an 85% chance of a 25-basis point rate cut at the Federal Reserve’s next meeting on December 18th.
Market Reaction
The S&P500 index rose 0.8% for the week and closed at 6,090 points, a new all-time high. Markets seem to be trading on momentum and optimism for a more business-friendly administration in Congress and the White House.
On the bond side, the U.S. 10 Year Treasury Yield fell to a close of 4.17% from a weekly peak of 4.28%, reflecting a slight increase in optimism around new administration’s potential to rein in government spending and shore up the deficit situation.
The big winner of the week was Bitcoin, which rose 3.15% this week to a peak of over $100,000 USD for the first time in its history. Bitcoin’s market cap is almost $2 Trillion USD by itself, and it flipped Saudi Aramco to become the world’s 7th-largest asset in any category. The total crypto market cap sits at $3.64 Trillion USD and the fear-and-greed index is at 82, suggesting overbought conditions but not quite hitting an extreme.
Canada
Bleak Employment Situation Deteriorates Further
The latest Canadian jobs report showed an increase of 51,000 new jobs in November, beating expectations of 15,000. However, 45,000 of those 51,000 jobs were in the public sector, raising questions about how much these new positions would contribute to the economy.
The unemployment rate rose to 6.8% in November, the highest non-pandemic reading since January 2017. The total unemployed population rose to 1.5 million, versus 1.22 million in November 2023, and nearly half of the unemployed have not worked in at least 1 year. Further, youth unemployment rose again to 13.9%, snapping a two-month stretch of improvement.
The Week Ahead in Global Macro
This week will feature interest rate decisions in both Canada and Europe, as well as key inflation data in the U.S. The Bank of Canada (BoC) will meet on Wednesday, December 11th to set the key interest rate. At the last BoC meeting, the rate was cut from 4.25% to 3.75%, and expectations are for another 50-basis point cut, bringing the rate down to 3.25%.
U.S. markets will contend with Consumer Price Index (CPI) and Producer Price Index (PPI) reports this week. On the CPI side, expectations are for a headline reading of 2.7% YoY after a 2.6% previous report, while PPI is expected to come in at 2.5% after a previous reading of 2.4%
Crypto Market Overview
Over the past week, both Bitcoin (BTC) and Ethereum (ETH) have experienced an uptick in implied volatility, reflecting heightened expectations for potential price movements, despite relatively subdued realized volatility. The term structures for both assets have remained steep for BTC, suggesting greater anticipated volatility in the medium term, while Ethereum’s term structure is flatter, reflecting more stable expectations.
Implied and Realized Volatility
Implied volatility for BTC has seen a slight uptick this week. This is likely a reflection of market participants anticipating potential price movement. IV for BTC is currently in the range of 60–65%, a modest increase from last week’s levels of around 55–60%. This rise in implied volatility suggests that options traders expect more potential price fluctuations in the near term, which could be linked to upcoming events or broader market trends affecting risk assets.
Similar to BTC, Ethereum’s implied volatility has also seen a moderate increase. ETH IV is currently hovering around 55–60%, up from the 50–55% range seen the previous week. The rise is consistent with broader market uncertainty surrounding tech stocks, which have shown correlation to ETH’s performance recently.
Realized volatility for BTC has been relatively subdued, registering a value between 3–4% on a 7-day rolling window. This is well below its implied volatility counterpart, highlighting a disconnect between expectations and actual price movement. Over the past week, Bitcoin’s price remained within a relatively tight range, with only brief moments of increased volatility. This could indicate that the market has been in a consolidation phase, despite higher expectations for movement.
Realized volatility for ETH has been slightly higher than BTC, at 4–5% on a 7-day basis. This has been partly due to Ethereum’s more pronounced price swings compared to Bitcoin, driven by larger intraday fluctuations.
Term Structure and Skew
The term structure of BTC options has remained relatively steep this week, indicating that the market is pricing in higher volatility further out in time. For example, the 30-day at-the-money (ATM) options implied volatility is around 60%, while the 90-day options implied volatility has risen to around 70%. This steepening term structure suggests that investors are anticipating greater price movements in the medium to long term, possibly linked to broader economic factors such as the potential for changing interest rates, geopolitical instability, or regulatory decisions affecting cryptocurrencies.
The term structure of Ethereum options has been less steep compared to Bitcoin, with less differentiation in volatility between short and long-term maturities. The 30-day IV for ETH stands at 55%, while the 90-day IV is approximately 60%. The flatter term structure implies that the market does not anticipate extreme price movements over the medium term for Ethereum, as compared to Bitcoin, which might be more susceptible to macroeconomic shocks.
Bitcoin’s options skew has been tilted positively, with out-of-the-money (OTM) calls trading at a premium relative to OTM puts. This suggests that there is a prevailing bullish sentiment in the market, as traders are willing to pay more for upside exposure. The skew has remained relatively stable throughout the week, hovering around +5 to +7% for the 30-day maturity. A positive skew signals that traders are more concerned with upside potential than downside risk, though this may also reflect a hedging bias among investors who prefer to protect against any unexpected price surges.
Ethereum’s options skew has been slightly negative, with puts trading at a slight premium to calls. This reflects a mild bearish sentiment in the market, as traders have been slightly more inclined to hedge against downside risk. The skew has ranged between -2% to -4% over the past week, suggesting that while the broader market sentiment is somewhat optimistic, there is still concern over a potential price correction.
Options Flows and Positioning
Bitcoin options flows have been predominantly focused on longer-dated calls, indicating that investors are positioning for potential upside over the next several months. A significant portion of the flow has been in the 3 to 6-month maturity range. This suggests that traders expect significant upside potential in BTC over the medium term, possibly driven by broader adoption of Bitcoin in the financial ecosystem. The total volume of BTC options traded has seen a moderate increase this week, with more activity in calls than puts, confirming the bullish bias. Ethereum options flows have been more balanced compared to Bitcoin. There has been a noticeable interest in both call and put options. ETH options traders have shown some interest in hedging against downside risk. The flow in short-term options, particularly 7–14 day maturities, has been notable, likely due to the increased uncertainty in the broader crypto market.
Net positioning in BTC options remains positive, with a skew toward call options, signaling that investors are generally more bullish on the cryptocurrency’s future price movements. Open interest in BTC call options has increased, while put option open interest has remained relatively flat, further supporting the notion that market participants are more focused on upside potential. This positioning is consistent with the implied volatility figures, which suggest heightened expectations for upward price movement. Positioning in Ethereum options is more neutral compared to Bitcoin, with some investors favoring downside protection through put options and others leaning towards calls. The net positioning has shown a slight tilt toward hedging against downside risk, which aligns with the negative skew observed earlier. Open interest in ETH puts has risen moderately, reflecting caution in the market, but it has not overshadowed the overall interest in calls. This balanced positioning suggests that the market is weighing both the potential for growth and the risks of a price retracement.
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Disclaimer: This article is not intended to provide investment, legal, accounting, tax or any other advice and should not be relied on in that or any other regard. The information contained herein is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of cryptocurrencies or otherwise.
