Weekly Commentary: Uncertain Futures

ETH spot prices have under-performed BTC’s in 2023, beginning most prominently in mid-March. However, a trend lower in the spot yields implied by the market price of ETH futures following the selloff on the 18th August. This leaves ETH yields nearly 5% lower at an annualised rate, reflecting a similarly poor sentiment expressed by the lacklustre funding rate of its perps. We do not see the same difference in sentiment in the skew of their respective volatility smiles, suggesting that the difference in pricing in the futures markets is the result of hedging activity, rather than the explicit expression of a directional view on spot.

YTD Spot Performance

Figure 1 Daily year-to-date performance of BTC (yellow) and ETH (purple) spot prices insince January 2023. Source: Block Scholes

• ETH spot prices have under-performed BTC’s in 2023.
• As of the 10th October, BTC reports a gain of 67.1%, while ETH is up only 33% from its January levels.
• Both majors stand to benefit from the positive approval of any one of many spot ETF applications, with many anticipating that it will open the floodgates for institutional investors.
• A spot ETF for ETH could lead to an increased insistutional presence in staking as asset managers look to earn on the ETH that they hold.

Futures-Implied Yields

Figure 2 4-hourly spot yields implied by the market prices of 1-month tenor BTC (yellow) and ETH (purple) futures. Source: Block Scholes

• While the under-performance in spot prices has been noticeable since mid-March, ETH’s future- implied yields have tracked BTC’s for much of the year.
• This changed following the spot selloff on the 18th August.
• Since then, ETH yields have trended to 0% at an annualised rate.
• We see a similar sentiment in the funding rate of ETH perps, which have often failed to express a willingness to pay for long ETH exposure at the same time as BTC.

25 Delta Risk Reversal

Figure 3 4-hourly history of BTC (yellow) and ETH (purple) 1-month, 25-delta risk reversal since January 2023. Source: Block Scholes

• We do not see the difference in sentiment reflected in the skew of each assets’ volatility smile.
• ETH’s 25 delta risk-reversal has traded further in favour of the implied vols of puts than BTC’s for several periods this year.
• However, the spreads between puts and calls in both markets have oscillated between -5% and 0%, with little to separate them for any extended period of time in the last two months.
• This suggests that the bearish sentiment expressed by ETH’s futures markets could be the result of hedging behaviour, rather than an explicit expression of a directional view on spot.