With the arrival of the Christmas holiday, the annual delivery of derivatives on Dec 31 has become the last focus of the market in 2021.

High inflation in major capital markets is expected to continue until the end of 2022q1 at least, which may continue to provide some support for the performance of the crypto market.

The annual derivatives delivery may trigger a low-level rebound in market volatility, but taking into account the influence of holiday factors, and the new contracts will launch in early Jan, the significant rebound in volatility may be postponed to early Jan next year.

The Gifts of Christmas Eve: $50,000 and $4,000

On the occasion of Christmas, the spot market ushered in a rare calm. Around Christmas Eve, following the pace of other risky assets, the prices of BTC and ETH finally regained the $50,000 and $4,000 mark, putting an end to the turmoil in the crypto market in the past month.

Although the US November PCE data and the monthly rate of durable goods orders were slightly higher than expected, the US personal income and expenditure data were relatively stable, and the initial unemployment benefits data remained at historical lows. As a result, the DXY did not respond much to last week’s economic data, and the Fed’s aggressive policies have also received effective macroeconomic support.

However, considering that the crypto market has already incorporated possible policy impacts into price earlier, the main economic data this week has no significant impact on the market, and investors’ expectations of high inflation are still providing sufficient support for the crypto market.

From the perspective of volatility, the volatility of mainstream cryptos fell rapidly within a week to the lowest level since the year, which seemed a bit unexpected to investors. However, considering the gradual maturity of the crypto market since 2021H2, a stable and low volatility situation in the future may become the norm. For options traders, this means stable risk premiums.

Skew data and futures premium data also reflect a significant recovery in market sentiment. Compared with BTC, the skewness of ETH’s front-month options has risen significantly, indicating that investors are more bullish in the short term, while the skew data of BTC has completely turned positive, showing that pessimism is no longer dominating the market. The continuous low premium of BTC and ETH’s front-month futures also disappeared after the Christmas Eve delivery, and there was even a contango situation.

Annual Derivatives Delivery: “The Largest Scale”

For spot traders, they can already rest. But for derivatives traders, there is one final threshold: the annual derivatives delivery on Dec 31, also known as “Crypto Witching Day”.

Compared with the past, benefiting from the development of crypto market in the past year, in the options market alone, the total notional value of the mainstream crypto options contracts delivered on Dec 31 has exceeded $9.37b, which is comparable to the scale of open interest in the mainstream crypto futures market.
At the same time, in the CME exchange, which is dominated by institutional participants, the notional value of the pending BTC futures contracts has reached 38,045 BTC (approximately $1.94b), which was hard to see in the past.

With such a large-scale delivery of derivatives, it seems inevitable that volatility will rise again. To avoid volatility, many traders have chosen to close their positions at a profit, resulting in the first significant rebound in the Bitcoin wallet balance on the exchange after a five-month decline. Among them, the number of BTC net inflows in last week on the Binance exchange reached 68,170.

However, from the perspective of Forward IV, there may not be much volatility this week, and the timing of the volatility rise seems to have been postponed to the end of the year. The possible reason is that the gradual release of the margin is after the completion of the settlement, and the launching of new contracts also occurs after the year. Data from 2021 shows that high volatility often occurs shortly after the launch of new contracts.

Perhaps 2021 will eventually pass peacefully, but no matter if the delayed rise in volatility happened or not, the impact of derivatives delivery is still one of the focuses investors need to pay attention to soon. After the end of the New Year holiday, the release of a series of vital economic data led by non-agricultural employment data may become a new catalyst for the rise in the volatility of the crypto market after Crypto Witching Day.

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