Title: The Passing of FIT21 Bill Boosts Cryptocurrency Market Sentiment, ETH Derivatives Market Analysis Reveals
Introduction:
On May 23, 2024, the US House of Representatives passed the 21st Century Financial Innovation and Technology Act (FIT21) with a vote of 279 to 136. The legislation, primarily driven by House Republicans, aims to establish a regulatory framework for the US cryptocurrency market, implement consumer protection measures, designate the Commodity Futures Trading Commission (CFTC) as the primary regulatory authority for digital assets, and oversee non-securities spot markets. The Democrats in the House showed strong support. The passage of this cryptocurrency market structure bill marks a significant legislative achievement for the industry in Congress.
Following the House vote, the bill will now proceed to the Senate and ultimately be determined by the president’s action whether it becomes law.
This bill is particularly significant for cryptocurrencies other than Bitcoin that have been affected by the uncertain regulatory environment. It is expected to reduce the legal uncertainties and regulatory risks faced by many cryptocurrencies currently. The final outcome of this remarkable bill becoming law and the timely approval of an ETH ETF are crucial determining factors for the start of the altcoin season. This article examines and summarizes the market sentiment and direction provided by the ETH derivatives market from the perspectives of CME open interest data, options market term structure, and important market maker hedging levels.
Key Points:
In terms of CME open interest, comparing the growth in open interest before the approval of the BTC ETF, from 71,600 contracts in October 2023 to a high of 138,200 contracts after approval on January 12, 2024, it nearly doubled. Subsequently, BTC experienced a 20-day correction with a profit-taking of 13,000 contracts, bringing the open interest down to 125,200 contracts. Another major upward move commenced after February 4, reaching a high of 176,100 contracts on March 22, the current CME open interest peak.
Looking at the CME open interest for ETH, it increased from 225,900 contracts on May 20 to 312,100 contracts on May 23. The significant increase in a short period of time indicates that institutional investors were not actively betting on an ETH ETF before, and there were no significant pre-betting by long positions. Currently, ETH CME open interest is still on an upward trend.
There is selling pressure from options market makers’ hedging around $4,000 for ETH, while there has been significant buying pressure from the expiration of options contracts around $3,750, which has now been reached. The main hedging support has moved down to around $3,500. From a hedging perspective, the range of ETH volatility is between $3,500 and $4,000, but it could break out of this hedging range if there is more external demand or supply.
Data Source: Coinglass
From the options market term structure and ETH/BTC futures exchange rate, it still indicates a stronger bullish sentiment for BTC in the longer term.
Data Source: Signalplus
In terms of options gamma levels across different expiration dates, there is at least 5,000 ETH in gamma hedging selling pressure around $4,000 for ETH, while there has been significant buying pressure from the expiration of options contracts around $3,750, which has now been reached. Therefore, from a hedging perspective, the range of ETH volatility is between $3,500 and $4,000, but it could break out of this hedging range if there is more external demand or supply.
May 23, 2024, 1:00 PM Eastern Time
May 23, 2024, 2:00 PM Eastern Time
Gamma is an indicator that measures the rate of change of Delta (sensitivity of option prices relative to the underlying asset price). For sellers, as the underlying asset price rises, the Delta of the sold call options becomes closer to -1 (e.g., if the initial Delta was -0.3, it may become -0.6). A negative Gamma means that as the underlying asset price rises, the rate of change of Delta slows down. This increases the risk for sellers as they need to engage in more buying hedging in an upward market condition.
However, when the overall market is net long, meaning there are more positions with positive Gamma, the focus is on selling spot positions as the main form of hedging. This means there is a greater demand for hedging by selling spot ETH at the $4,000 level.