Weekly Commentary: Lawsuit Volatility

Monday’s announcement by the SEC targets Binance’s activities in the US and names several prominent Proof of Stake and Ethereum hosted tokens as securities. However, spot markets reported an outperformance by ETH over BTC and derivatives markets are pricing ETH options at a lower level of implied volatility across the term structure. It is only the skew of both assets’ volatility smiles towards OTM calls or puts that indicates a more negative sentiment held towards ETH.

Perpetual Swap Prices

Figure 1 Minute resolution BTC (yellow) and ETH (purple) perpetual swap contract price traded as listed on Deribit over the last 24H (timestamps in UTC). Source: Block Scholes

• On Monday, the SEC filed a lawsuit against crypto exchange Binance.
• Their allegations include the unregistered sale and trading of securities to US investors through their staking service.
• They also named several Proof of Stake tokens as securities, including MATIC and SOL.
• The news led to a crypto-wide selloff in spot prices that was felt more harshly by BTC (down a maximum of 5.09%) than by ETH (down 3.5%).
• BTC’s larger selloff is strange given that the lawsuit focuses so heavily on staking services.

ATM Implied Vol

Figure 2 Minute resolution BTC (yellow) and ETH (purple) 2-week tenor, ATM implied volatility (timestamps in UTC). Source: Block Scholes

• The reaction by derivatives markets was muted in comparison, with the 2-week ATM level rising only around 5%.
• Such a low estimate of forward looking volatility is strange given the large pickup in realised volatility following a 5% move in spot prices.
• This is still near to the lower end of implied vol’s historical range.
• After cooling somewhat in the hours since the announcement, ETH’s volatility has settled at 2 vol points lower than that of BTC.

25 Delta Put Call Skew

Figure 3 Minute resolution 2-week tenor, 25-delta Risk Reversal for BTC (yellow) and ETH (purple) over the last 24H (timestamps in UTC). Source: Block Scholes

• Despite outperforming BTC in spot markets and settling at a lower level of implied volatility, ETH’s vol smile is slightly more skewed towards OTM puts.
• ETH’s downside protection at a 25-delta level is currently trading at 5.5 vol points above similarly OTM calls.
• That is slightly stronger than BTC’s 25-delta RR which trades near -4%, and is the result of a stronger recovery by BTC in the two hours after the announcement.