OTC Desk Market Update: ETH vs BTC — Key Volatility Patterns to Watch
Welcome back to our weekly market update! Here are the top things we’ll be paying attention to this week:
- U.S. ISM Manufacturing Data on Monday
- U.S. Unemployment Rate on Friday
- Options Expiry on Friday
Macro Update
Inflation Remains Sticky
The U.S. Personal Consumption Expenditures (PCE) price index, a key measure of inflation closely monitored by the Federal Reserve, rose about as expected in April. The core PCE, which excludes volatile food and energy costs, increased by 0.2% for the month and 2.8% on an annual basis, slightly higher than estimates.
Fed’s Preferred Inflation Gauge
The Fed prefers the PCE over the more widely followed Consumer Price Index (CPI) as it accounts for changes in consumer behavior and has a broader scope. The core PCE has been trading in a range for five months, indicating persistent inflationary pressures that are not easing as quickly as desired by the central bank.
Energy and Food Prices
Energy prices rose 1.2% during the month, contributing to the overall increase in headline inflation. However, food prices declined by 0.2%, providing some relief for consumers.
Income, Spending and Market Reaction
Personal income increased by 0.3%, matching estimates, while consumer spending rose by a modest 0.2%, below expectations. Adjusted for inflation, spending showed a 0.1% decline, driven by a 0.4% decrease in goods spending and a 0.1% rise in services expenditures.
Following the release, stock futures rose, and Treasury bond yields moved lower, indicating a positive market reaction to the data. However, investors remain cautious, as the Fed has signaled that it will take more than one month of favorable data to confirm a sustained decline in inflation.
Fed’s Cautious Approach
As inflation data has remained elevated, Fed officials have advocated for a cautious approach, reducing the likelihood of interest rate cuts in the near term. New York Fed President John Williams recently stated that while he is confident inflation will continue to recede, prices are still too high, and he has not seen sufficient progress toward the Fed’s 2% annual target.
Rate Cut Expectations
Market expectations for rate reductions this year have been tempered. Pricing on Friday morning indicated a probability that the first rate cut is unlikely to occur until November, at the Fed’s meeting that concludes two days after the presidential election.
Crypto Market Overview
Weekly and Monthly Returns (%)
Implied and Realized Volatility
After the significant market swings last week, which included a 20% rally, realized volatility (RV) has started to calm down. However, the 10-day realized vol still reflects the substantial jump in Ethereum’s (ETH) price. In contrast, the 7-day realized vol, which leaves behind the 20% move, has rolled over to about 40–50. For Bitcoin (BTC), realized vol is sitting at around 30–40. Despite this, there is a bit of positive carry in Bitcoin, with implied weekly volatility slightly higher and 30-day options even higher. The current volatility term structure shows a contango curve. Implied volatility (IV) is forward looking, so it can at times be a leading indicator of realized volatility, which appears to be happening now. Short gamma players are likely to stick with Bitcoin as Ethereum’s volatility is less attractive to sell. The volatility of volatility (Vol of Vol) in Ethereum has been significant, with implied volatility jumping from 60 to nearly 100 and then back to 60. This high volatility of volatility indicates a risk for short gamma positions in Ethereum, making it prudent to keep an eye on the amount gamma selling in Ethereum volatility at this t
Term Structure and Skew
The term structure of volatility has seen a general shift lower. Bitcoin’s term structure has shifted downward by about 2–3 volatility points from June to September, except for the front weekly options. June saw a significant five-point drop, while the back-end only decreased by one point. In contrast, Ethereum experienced a dramatic front-end volatility reset, with a 20-point drop in the front-end, and a 10-point decrease for June expiries, while the back end remained unchanged.
Bitcoin’s skew is softening, giving up some of its call premium. The front-end has flipped back into put premium. However, there is still a five-volatility point call premium in the back-end for Bitcoin. For Ethereum, there is a noticeable call bid in the front-end, despite the volatility crush, due to the perceived risk of upward price movement if ETF inflows materialize. The long-end skew for Ethereum has increased to 5 points, higher than Bitcoin’s long-end skew, indicating a preference for Ethereum options over Bitcoin in the short-ter
Options Flows and Positioning
Bitcoin continues its holding pattern between $65,000 and $70,000 USD and unless it breaks through the top of its range, around $72,000-$73,000 USD it will be difficult to change the behavior of option traders around BTC. Until then, the most popular trade has been shorting BTC option premiums to fund a long position in Ethereum or remaining relatively neutral on Bitcoin until a new narrative develops. A break above $73,000 USD could lead to a significant acceleration in volatility as this is where market-makers are short the most gamma.
Ethereum’s implied volatility suggests a higher risk for short gamma positioning, particularly with the potential for rapid price increases if ETF inflows materialize. The $4,500 USD strike is the level to watch. A break above this level could drive ETH volatility higher as a function of market-maker hedging. To take advantage of this potential, option traders have begun to purchase call spreads, especially now that the Ethereum ETF continues to lead the narrative.
As always, our team is here to assist you and provide services tailored to your specific needs. If you would like to discuss these topics further, we invite you to book a meeting with our team.
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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.
