- The macroeconomic turmoil was a significant factor that impacted significantly on risk assets.
- The realized volatility of Bitcoin at the end of December 2024 was twenty points lower than the implied volatility for one month.
At the beginning of the new year, Bitcoin momentarily recaptured the $100,000 level, which caused investors to feel a tremendous amount of enthusiasm. The rise, on the other hand, did not last long since the sentiment of the derivatives market and the data from the macroeconomic data did not give sufficient support for sustained growth as mentioned in the recent release the latest crypto derivatives report, published weekly with Blocks Scholes.
Macro Data and Inflation Pressures
The macroeconomic turmoil was a significant factor that impacted significantly on risk assets. The Job Openings and Labor Turnover Survey (JOLTS) of the United States reported that there were 8.1 million job openings in November, which is a six-month high. This indicates that the labor market is doing well. At the same time, the ISM Services Index for December revealed a six-point increase in service costs, which fueled fears about the continuation of inflation. The speed of future interest rate decreases in the United States, which are essential for equity assets that are reliant on liquidity, such as cryptocurrencies, was called into question as a result of these data points.
Rising energy prices are the primary factor behind the headline inflation rate of 2.4% and the core inflation rate of 2.7% that were revealed by flash inflation estimates for the month of December 2024 in Europe. While this was going on, China continued to struggle with deflationary pressures, which brought attention to the disparity in the global economy.
Derivatives Market Sentiment: A Mixed Bag
Similar to the cautious macroeconomic environment, the derivatives markets exhibited the same behavior. The realized volatility of Bitcoin at the end of December 2024 was twenty points lower than the implied volatility for one month. This represented the largest volatility premium since the elections of 2020 in the United States. The longer-term options, on the other hand, displayed a bullish skew, which indicates that investors are optimistic about Bitcoin’s long-term prospects.
Despite the fact that trading volumes were lower during the holiday season, open interest in Bitcoin perpetual contracts remained stable compared to levels preceding the great expiration of options contracts in Dec. 2024. This was one of the factors that contributed to the reduction in realized volatility. On the other hand, Bitcoin and Ethereum’s options trading displayed tendencies that were different from one another. As a result of an increase in longer-term implied volatility, the term structure of Bitcoin became more steep. On the other hand, Ethereum experienced a significant increase in put contracts, which indicated that traders were taking a cautious approach.
Bybit Analytics: Key Insights
According to the report published by Bybit, trading volumes concerning Bitcoin and Ethereum perpetual contracts experienced a significant decrease over the course of the winter break. The decline in liquidity was not confined to weekends or holidays; rather, it persisted throughout the entire period, which contributed to a reduction in volatility that was quite significant. In spite of this, open interest levels remained unchanged, which seems to indicate that market participants were not heavily hedging their positions.
On the front of options, Bitcoin and Ethereum displayed dynamics that were very different from one another. Following the expiration of contracts in December, the open interest in Bitcoin options was balanced, whereas traders in Ethereum tended to favor put contracts, which reflected a bearish sentiment.
Funding Rates and Market Reactions
Bitcoin’s first surge over $100,000 was backed by positive funding rates at the beginning of the year. This climb was fueled by ETF inflows totaling roughly $2 billion over the course of two trading days. After the publication of the JOLTS data, however, the bullish attitude saw a dramatic shift in the other direction. The funding rates went into the negative, but the absence of substantial liquidation events indicated that the system had a lower level of leverage in comparison to prior market declines.
A Broader Perspective on Volatility
The realized volatility of both Bitcoin and Ethereum reached multi-month lows, with Ethereum’s realized volatility reaching 37%, which matches its lowest level since July 2024. Bitcoin’s volatility reached multi-month lows as well. Despite the absence of imminent triggers, traders in both markets priced their positions using term structures that exhibited a high degree of volatility, indicating that they anticipated abrupt price swings.
What Lies Ahead?
The cryptocurrency market may see new levels of volatility as it navigates the early days of 2025. This volatility may be caused by significant macroeconomic events such as the United States Nonfarm Payroll Report and China’s Consumer Price Index data. In addition, events in geopolitics and regulatory policies continue to be very important for the direction of the market.
Bitcoin’s short recovery above $100,000 demonstrates its potential as a high-beta asset, but it also underlines its sensitivity to macroeconomic headwinds and changing investor sentiment. Bitcoin’s price reached $100,000 for a brief period of time. For the time being, the cautious tone in derivatives markets and the uncertainties in the macroeconomic environment imply that sustained rising momentum may need stronger signs of reducing inflationary pressures and liquidity circumstances.
It is recommended that traders and investors keep a careful eye on these events since the interaction between macroeconomic variables and market mood is continuing to influence the landscape of cryptocurrencies. Access the full report here.