Derivatives Data Shows Weakening Crypto Enthusiasm

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Several months ago, investors facing FOMO – the fear of missing out – feared the ship had sailed when it comes to crypto. Now, however, while this ship may have left port, the wind is out of its sails as it floats directionless at the moment. It may be because of the upcoming Fed tightening; the enthusiasm seems to have died down. This sentiment is supported by some market data showing that market activity has fallen and this could take prices with it.

1. Funding rates have turned negative.

Rates from several major exchanges compiled by analytics firm CryptoQuant show that the cost of borrowing to buy leveraged crypto has dropped to the point where it is slightly negative. This implies that the demand for money to make leveraged bets has taken a hit. Traders are in no rush to add to their positions.

2. Open interest (OI) for bitcoin futures has been down slightly since the last week of December.

It’s currently $16 billion, according to data site Skew.com, up from just under $19 billion around Christmas. During Bitcoin’s November peak, open interest was around $26 billion.

3. Ether futures also saw a decline in open interest.

Since its own peak of $13 billion in November, open interest in the small ether futures market is currently around $8 billion.

4. Open interest in bitcoin and ether options is at its early October level.

OI for bitcoin options is now at $7 billion and $5 billion for ether. In December, those numbers were around $10 billion and $7 billion, respectively.

Some of the decline can be attributed to year-end bets taken throughout 2021. While current IOs are still much larger for both cryptocurrencies than last year, they are still roughly where things were in October, before the big race – the price hike.

5. Implied bitcoin volatilities fall precipitously.

Implied thefts, which are calculated from option premiums and gauge the market’s view of future risk, have fallen to levels not seen since October 2020. Certainly, steady levels of crypto implied volatilities would signal alarm and panic in the equity market, but since the second week of December, implied crypto thefts have been declining. Over the past two days, this decline has accelerated. Implied thefts at one-month parity are now at 60%; they had been hovering around 80% since the summer. When demand for options falls, implied volatilities fall with it.

6. Implicit Ether thefts are also down.

Now at 69%, implied volatilities on one-month at-the-money options on ETH had been around the 100% level since June. They had been regularly below 70% for more than a year.

The list is lengthened increasingly.

Of course, that doesn’t mean muted markets can go on forever, but in the days or weeks ahead, don’t be surprised if prices drift south.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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