Cycle Capital: The FIT21 bill is one step closer to becoming law, with the approval of the ETH ETF. What are the expectations for the derivatives market?

Author: BloFin Options Desk & Research Department, Head Griffin Ardern; LD Capital Yilan

Preface

On May 23, 2024, the U.S. House of Representatives passed the Financial Innovation and Technology Act of the 21st Century (FIT 21) with 279 votes in favor and 136 votes against it. The legislation, primarily driven by House Republicans, will establish a regulatory framework for the U.S. encryption market, set consumer protection measures, designate the Commodity Futures Trading Commission (CFTC) as the primary regulatory agency for digital assets, and regulate non-security spot markets. House Democrats performed strongly. The passage of this encryption market structure bill marks the most significant legislative achievement for the industry in Congress.

After the vote in the House of Representatives, the bill will proceed to the Senate and ultimately be determined whether it can become law by the President’s action.

This bill is particularly significant for cryptocurrencies other than Bitcoin that are affected by uncertain regulatory environments. It is expected to reduce the legal uncertainties and regulatory risks faced by many cryptocurrencies currently. Whether this remarkable bill can eventually become law and whether the approval of ETH ETF can be expedited are also important determining factors for the start of the altcoin season. This article studies and summarizes the market sentiment and direction of ETH in the derivatives market from the perspective of CME holdings data, options market term structure, and important MM hedging points.

Main Points

· Looking at the open interest of CME, compared with the growth of open interest before the approval of BTC ETF, it increased from 71,600 to a peak of 138,200 on January 12, 2024, nearly doubling. After that, with the positive news of BTC, there was a 20-day adjustment period, taking profit of 13,000 BTC, resulting in an open interest of 125,200. Another major rise started after February 4, reaching a current high of 176,100 on March 22.

· From the perspective of CME’s open interest, it increased from 225,900 coins on May 20th to 312,100 coins on May 23rd. The significant increase in a short period of time indicates that institutional investors were not actively betting on ETH ETF before, and there were no large number of long positions placed in advance. Currently, the open interest of ETH CME is still on the rise.

· There is selling pressure from options market makers hedging around $4000 for ETH, while buying pressure from options hedging near $3750 has already been triggered. Currently, the main hedging support has moved down to around $3500. From a hedging perspective, the fluctuation range for ETH is between $3500 and $4000, but it may break through this hedging 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

Options market-wise, first in terms of the term structure, BTC as a whole presents a rising structure, with implied volatility increasing with the expiration time, indicating an expectation of increased volatility in the distant future. ETH, on the other hand, is the opposite, with the market having high expectations for recent market volatility, and implied volatility gradually declining in the distant future. This means that BTC is still the preferred trading target for the long term, but ETH’s recent volatility performance is highly anticipated.

Data Source: Signalplus

From the perspective of option gamma level data, ETH has at least 5000 ETH of hedging selling pressure around 4000, while a large amount of end-date option hedging buying pressure near $3750 has been reached, and the main hedging support has moved down to around 3500. Therefore, from a hedging perspective, the fluctuation range of ETH exists around 3500-4000. However, if there is more external demand or supply, it will break through this hedging range.

2024.5.23 Eastern Time 1: 00

May 23, 2024 14:00 ET

Gamma is an indicator that measures the rate of change of Delta (the sensitivity of option price to changes in the underlying asset price).

For the seller, when the price of the underlying asset rises, the Delta of the sold call option will become closer to -1 (for example, if the Delta starts at -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 will slow down. This increases the risk for the seller, as they need to engage in more buying hedging in a rising market condition.

But when the overall market is in a net buying position, that is, when there are more positions with positive gamma, hedging is mainly done by selling high and buying low, that is, there is a greater demand for selling spot ETH at a price of 4000 for hedging.