Author: BloFin Options DeskResearch Department Leader Griffin Ardern; LD Capital Yilan
Introduction
On May 23, 2024, the US House of Representatives passed the 21st Century Financial Innovation and Technology Act (FIT 21) with 279 votes in favor and 136 votes against. This legislation, primarily driven by Republican members of the House, 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 body for digital assets, and regulate the non-securities spot market. Democrats in the House showed strong support. The passage of this cryptocurrency market structure bill marks the most significant legislative achievement for the industry in Congress.
After passing the House vote, the bill will now be passed to the Senate and ultimately be decided 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 uncertainty and regulatory risks faced by many cryptocurrencies currently. Whether this remarkable bill can ultimately become law and the timely approval of ETH ETF are also important determining factors for the start of the altcoin season. This article examines and summarizes the market sentiment and direction of ETH in the derivatives market from the perspective of CME open interest data, options market term structure, and key MM hedging levels.
Key Points
– Looking at CME open interest, comparing the growth of BTC open interest before the approval of BTC ETF from 71,600 coins in October 2023 to the peak of 138,200 coins after approval (January 12, 2024), nearly doubling, followed by a 20-day adjustment period with a profit-taking of 13,000 coins to 125,200 coins of open interest. Another major rally started after February 4, reaching the current CME open interest peak of 176,100 coins on March 22.
– Looking at CME open interest, it increased from 225,900 coins on May 20 to 312,100 coins on May 23. The significant increase occurred within a short time span, indicating that institutions were not actively betting on ETH ETF before, and there were no significant pre-betting by bulls. Currently, ETH CME open interest is still on the rise.
– ETH faces selling pressure from options market makers around $4,000, while significant buying pressure from options hedging has already been triggered around $3,750. The main hedging support has now moved to around $3,500. From a hedging perspective, the volatility range for ETH is between $3,500 and $4,000, but it may break out of this hedge range if there is more external demand or supply.
– The term structure of the options market and the forward exchange rate of ETH/BTC still indicate a stronger bullish sentiment for BTC in longer terms.
Data Source: Coinglass
In terms of options market, firstly, looking at the term structure, BTC shows an overall upward structure, with implied volatility increasing as the expiration time approaches, indicating that the market expects higher volatility in the future. On the other hand, ETH shows the opposite, with the market having high expectations for short-term market volatility, and IV gradually declining in the long term. This means that BTC is still the preferred asset for long-term trading in the market, but the recent volatility performance of ETH is promising.
Data Source: Signalplus
Looking at the gamma levels of options for different maturities, there is selling pressure of at least 5,000 ETH around $4,000, while significant buying pressure from options hedging has already been triggered around $3,750. The main hedging support has now moved to around $3,500. Therefore, from a hedging perspective, the volatility range for ETH is between $3,500 and $4,000, but it may break out of this hedge range if there is more external demand or supply.
Gamma is an indicator that measures the rate of change of Delta (the sensitivity of option prices to changes in the underlying asset price). For sellers, when the price of the underlying asset rises, the Delta of the sold call options becomes closer to -1 (e.g., if the initial Delta is -0.3, it may become -0.6). A negative Gamma means that as the price of the underlying asset 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 a rising market.
However, when the overall market is in a net buying position, meaning there are more positive Gamma positions, the focus of hedging is on selling spot ETH at a higher price and buying at a lower price. This means there is a higher demand for hedging by selling spot ETH at the $4,000 level.