AD Derivatives Newsletter: Ethereum ETF trading & Trump's BTC speech

USA Week Ahead (ET):

1. Wednesday 8:15am: ADP Employment

2. Wednesday 2:00pm / 2:30pm: FOMC & Press Conference

3. Friday 8:30am: Employment Report (NFP)

Disclaimer: Nothing here is trading advice or solicitation. This is for educational purposes only.

Authors have holdings in BTC, ETH, and Lyra and may change their holdings anytime.

MACRO

Last week we received more data on the economy and inflation. 

GDP grew at +2.8% per year in Q2, after being only +1.4% per year in Q1. This number continues to show a relatively strong economy. An important mandate for the Fed has been the labor market, which recently saw unemployment move higher to 4.1%, but that is historically a low number.

As the Fed balances unemployment and inflation through its dual mandate, the PCE data showed +2.6% core inflation year-over-year and 2.5% overall. This was in line with expectations and slightly below the 2.6% year-over-year released in May.

Chart: WSJ

Taken together, we’re almost certain to see rates unchanged this Wednesday as the conclusion of the FOMC meeting. The CME FedWatch tool shows that interest rate futures are pricing in a 96% chance of rates remaining unchanged.

Chart: CME FedWatch Tool

That said, the market is expecting a rate cut in the September FOMC meeting later this year. 

Two important things to watch out for this week will be the FOMC guidance hinting towards a shift in attitude that is friendly to a rate cut and Friday’s employment report. 

Further deterioration in the employment numbers will almost guarantee a rate cut during the September FOMC meeting.

Chart: USTreasuryYieldCurve.com

As seen above, the yield curve moved lower week-over-week as the market digested economic data that supports a September rate cut. 

BTC: $68,061 (+0.2% / 7-day)

ETH :$3,257 (-7.4% / 7-day)

SOL :$183.28 (+0.1% / 7-day)

Crypto Overview

We just witnessed a major week for crypto. We had the launch of the Ethereum ETFs trading debut and the Nashville Bitcoin conference speech from Trump.

Beginning with Ethereum. 

The start of Ethereum ETF trading was the quintessential display of “buy-the-rumor” and “sell-the-news” trading. 

Despite the initial reaction to the approval of the ETH ETFs from the SEC, which sent Ethereum prices spiking higher, the actual trading of the ETFs was dismal and caused ETH to drop -7.5% w/w despite flat BTC and Solana prices. 

Chart: TradingView.com

We believe that an early warning pointing to this potential reaction was the lackluster demand for CME ETH Futures compared to the enthusiasm displayed for CME BTC futures on similar news. 

Chart: BTC CME Futures OI (Green)

Chart: ETH CME Futures OI (Green)

The top chart shows BTC open interest across futures sets. CME demand for BTC exposure was huge, making CME the number one venue for BTC futures trading, driven by the BTC spot ETF. Unfortunately, the demand for ETH CME futures has been very lackluster. I expected the inflows into the ETH ETF to reflect a similar pattern; therefore, the demand for ETH exposure is likely to be underwhelming compared to BTC ETF.

Ethereum has continued to be an underwhelming asset in 2024 compared to BTC (similar dynamics were witnessed in 2023). 

More thoughts on ETH later. 

The big wild-card for Bitcoin this week was Trumps speech during the Bitcoin Conference in Nashville on Saturday. 

We can see that implied volatility was pricing in the speech… Although some volatility came into the market as BTC dropped from $69.5k→ $66.5k→ $69.2k in a rather quick roundtrip, unless you were a gamma scalper the price action was a bit disappointing. 

Chart: Lyra BTC Perp

Chart: BTC Constant Maturity ATM Term Structure

It continues to seem that crypto volatility “events” tend to be over-implied and under-realized. (PoS merge, Shanghai upgrade, BTC ETF, Halving, etc).

We did however get a few interesting items from the Trump speech should he become president again: 

1. US Gov will HODL BTC owned and not sell in the open market, essentially starting a strategic reserve. 
2. Crypto mining industry will be encouraged on-shore and aided by plans to create cheap electricity. 
3. Ross Ulbricht will have his sentence commuted
4. Gary Gensler will be fired. 

ZeroHedge.com

The last point, around firing Gary G., might be a encouraging development for the ETH maxis. 

Unlike BTC, which is decidedly a commodity and regulated by the CTFC, the Ethereum ecosystem is mostly categorized as securities which support DeFi and other projects with regulatory ambiguity. 

Should regulation become more friendly, we might actually see a boom for DeFi and other Ethereum ecosystem projects which could give value to the underlying ecosystem gas (Ethereum). 

Something to keep in mind, but for the time being Ethereum remains disappointing and likely a relative vol. “sell” compared to BTC.

Paradigm's Week In Review

We saw a big divergence in spot with BTC rallying ahead of the Bitcoin conference, while ETH tumbled following a dismal ETF launch with ETHE outflows dominating, causing ETHBTC cross to break 0.05 clean. In the options space, most of the flows were mainly in BTC despite the ETH ETF launch. We saw decent selling interest in BTC Dec 100k & 110k calls which caused backend call skew to revert after weeks of firmness. This was probably much needed supply for the market given the prior constant buying flow in BTC Dec calls for post-election optionality. 

BTC frontend vol remained firm through this week as event premium for the Bitcoin conference remains intact, while ETH frontend vol came in considerably especially call skew as spot gave up gains post ETF launch. All eyes will be on Trump this weekend – Sunday straddles are pricing in a 5% breakeven which is not cheap but plausible given the market’s sensitivity to Trump’s statements on Bitcoin, especially with rumors circulating regarding its inclusion in the US strategic reserve. Given the strong rally in BTC from 64k to 67k since yesterday, we might see a “buy rumor sell fact” scenario as market expectations are high at this point. Either way, we are bound to expect some form of volatility for the event so stay tuned.

Paradigm Top Trades This Week

Weekly BTC Cumulative Taker Flow

Weekly ETH Cumulative Taker Flow

BTC Cumulative OI

ETH Cumulative OI

BTC

ETH

AMBERDATA DISCLAIMER: The information provided in this research is for educational purposes only and is not investment or financial advice. Please do your own research before making any investment decisions. None of the information in this report constitutes, or should be relied on as a suggestion, offer, or other solicitation to engage in, or refrain from engaging, in any purchase, sale, or any other investment-related activity. Cryptocurrency investments are volatile and high risk in nature. Don't invest more than what you can afford to lose.