The macroeconomic turmoil had a significant impact on risk assets. The implied volatility for one month was twenty points higher than the realized volatility of Bitcoin at the end of December 2024. At the beginning of the new year, Bitcoin briefly surpassed the $100,000 level, generating a lot of enthusiasm among investors. However, this rise was short-lived due to the lack of support from the derivatives market sentiment and macroeconomic data, as stated in the latest crypto derivatives report published by Blocks Scholes on a weekly basis.
The macroeconomic data and inflation pressures played a crucial role in shaping market conditions. The Job Openings and Labor Turnover Survey (JOLTS) reported a six-month high of 8.1 million job openings in the United States in November, indicating a strong labor market. Meanwhile, the ISM Services Index for December showed a six-point increase in service costs, raising concerns about inflation. These data points raised doubts about the pace of future interest rate cuts in the US, which are important for liquidity-dependent equity assets like cryptocurrencies.
Rising energy prices were the main driver behind the headline inflation rate of 2.4% and the core inflation rate of 2.7% in Europe, as estimated in December 2024. China, on the other hand, continued to face deflationary pressures, highlighting the disparities in the global economy.
The derivatives market sentiment mirrored the cautious macroeconomic environment. The realized volatility of Bitcoin at the end of December 2024 was twenty points lower than the implied volatility for one month, marking the largest volatility premium since the 2020 US elections. However, longer-term options displayed a bullish skew, indicating optimism about Bitcoin’s long-term prospects.
Despite lower trading volumes during the holiday season, open interest in Bitcoin perpetual contracts remained stable compared to pre-expiration levels in December 2024. This contributed to the reduction in realized volatility. Bitcoin and Ethereum options trading showed different tendencies, with Bitcoin’s term structure becoming steeper due to an increase in longer-term implied volatility, while Ethereum experienced a significant rise in put contracts, reflecting a cautious approach by traders.
According to a report by Bybit Analytics, trading volumes for Bitcoin and Ethereum perpetual contracts decreased significantly during the winter break. This decline in liquidity persisted throughout the entire period, resulting in a significant reduction in volatility. However, open interest levels remained unchanged, suggesting that market participants were not heavily hedging their positions.
In terms of options, Bitcoin and Ethereum demonstrated contrasting dynamics. After the expiration of contracts in December, the open interest in Bitcoin options was balanced, whereas traders in Ethereum favored put contracts, indicating a bearish sentiment.
The initial surge of Bitcoin above $100,000 was supported by positive funding rates at the beginning of the year, driven by approximately $2 billion in ETF inflows over two trading days. However, after the release of the JOLTS data, the bullish sentiment took a dramatic shift as funding rates turned negative. Despite this, the absence of significant liquidation events indicated a lower level of leverage compared to previous market declines.
Both Bitcoin and Ethereum experienced multi-month lows in realized volatility, with Ethereum reaching 37%, its lowest level since July 2024. This indicates that traders in both markets anticipated abrupt price swings, despite the absence of immediate triggers.
Looking ahead, the cryptocurrency market may face increased volatility in the early days of 2025 due to significant macroeconomic events such as the United States Nonfarm Payroll Report and China’s Consumer Price Index data. Geopolitical events and regulatory policies also continue to play a crucial role in shaping market direction.
Bitcoin’s brief recovery above $100,000 demonstrates its potential as a high-beta asset, but it also highlights its sensitivity to macroeconomic headwinds and changing investor sentiment. However, the cautious tone in derivatives markets and the uncertainties in the macroeconomic environment suggest that sustained upward momentum may require stronger signs of reduced inflationary pressures and improved liquidity conditions.
Traders and investors are advised to closely monitor these events as the interaction between macroeconomic variables and market sentiment continues to influence the cryptocurrency landscape. The full report can be accessed here.
