- The macroeconomic turmoil was a significant factor that significantly affected risk assets.
- The realized volatility of Bitcoin at the end of December 2024 was twenty points lower than the one-month implied volatility.
At the beginning of the new year, Bitcoin temporarily recaptured the $100,000 level, causing investors to feel tremendous enthusiasm. The upswing, on the other hand, did not last long as sentiment in the derivatives market and data from macroeconomic data did not provide enough support for sustained growth as mentioned in the latest release the latest crypto derivatives reportpublished weekly with Blocks Scholes.
Macro data and inflationary pressures
The macroeconomic turmoil was a significant factor that significantly affected risk assets. The Job Openings and Labor Turnover Survey (JOLTS) in the United States reported that there were 8.1 million job openings in November, a six-month high. This indicates that the labor market is doing well. Meanwhile, the ISM Services Index for December revealed a six-point increase in service costs, fueling fears of continued inflation. The pace of future rate cuts in the US, which are essential for equity assets that rely on liquidity, such as cryptocurrencies, were called into question as a result of these data points.
Rising energy prices are the primary driver behind the headline inflation rate of 2.4% and core inflation of 2.7% 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, drawing attention to the differences in the global economy.
Derivatives market sentiment: A mixed bag
Similar to the cautious macroeconomic environment, derivatives markets exhibited the same behavior. The realized volatility of Bitcoin at the end of December 2024 was twenty points lower than the one-month implied volatility. This represented the largest volatility premium since the 2020 US election. The long-term options, on the other hand, showed a bullish bias, indicating that investors are optimistic about Bitcoin’s long-term prospects.
Despite lower trading volumes during the holiday season, open interest in Bitcoin perpetual contracts remained stable compared to previous levels the large expiration of option contracts in December 2024. This was one of the factors that contributed to the reduction in realized volatility. On the other hand, Bitcoin and Ethereum options trading showed trends that differed from each other. As a result of an increase in long-term implied volatility, the term structure of Bitcoin became steeper. On the other hand, Ethereum experienced a significant increase in selling contracts, indicating that traders were taking a cautious approach.
Bybit Analytics: Key Insights
According to the report published by Bybit, trading volumes for Bitcoin and Ethereum perpetual contracts experienced a significant decrease during the winter break. The decline in liquidity was not limited to weekends or public holidays; rather, it was sustained throughout the period, contributing to a reduction in volatility that was quite significant. Despite this, open interest rates remained unchanged, which seems to indicate that market participants did not hedge their positions heavily.
Funding rates and market reactions
Bitcoin’s first rise above $100,000 was backed by positive funding rates at the start of the year. This rise was driven by ETF inflows totaling approximately $2 billion over the course of two trading days. After the release of the JOLTS data, however, the bullish sentiment saw a dramatic shift in the other direction. Funding rates dipped into negative territory, but the absence of significant liquidation events indicated that the system was at a lower level of leverage compared to previous market downturns.
A broader perspective on volatility
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 US Nonfarm Payroll Report and China’s Consumer Price Index data. In addition, events in geopolitics and regulatory policies continue to be very important to the direction of the market.
It is recommended that traders and investors keep a close eye on these events as the interaction between macroeconomic variables and market sentiment continues to influence the cryptocurrency landscape. Get access to the full report here.
