DeFi Options Vaults Drive ETH's Volatility Lower
  The latest moves in crypto markets, in context Edited by Omkar Godbole January 10, 2022 Sponsored by  If you were forwarded this newsletter and would like to receive it, sign up here.
Good morning, and welcome to First Mover. Here's what's happening this morning:
And check out the CoinDesk TV show "First Mover," hosted by Christine Lee, Emily Parker and Lawrence Lewitinn at 9:00 a.m. U.S. Eastern time. Today's show will feature guests:
Market Moves Bitcoin (BTC) traded flat to negative during the early hours of Monday, having slipped over 12% in the seven days to Jan. 9, the biggest weekly decline since early December.
The cryptocurrency's defense of the psychological support at $40,000 over the weekend failed to inspire bargain hunting, perhaps due to mounting concerns of faster liquidity withdrawal by the U.S. Federal Reserve (Fed).
Goldman Sachs foresees the Fed raising interest rates four times this year versus the previous projection of three rate hikes and expects the central bank to begin downsizing its balance sheet from July.
Investors appeared worried about a deeper drop in bitcoin, with one-week, one- and three-month puts – bearish bets in the options markets – drawing higher prices than calls, which are bullish bets.
Ether's (ETH) put-call skews showed a similar bearish bias as the cryptocurrency slipped 1%. Some traders took non-directional bets in ETH over the weekend, setting up "long straddles" in a bid to profit from a potential volatility explosion, according to data shared by Swiss-based Laevitas. A long straddle involves buying both call and put options of the same expiry and in equal number at strikes around the current market price. The strategy benefits from a big move in either direction.
Programmable blockchain Solana's SOL token struggled even as Binance.US announced it is building an office in Portals, a Solana-based metaverse platform recreating a dense urban environment.
Metaverse and gaming tokens traded lower, while DeFi names like UNI, LRC and NEAR rose 2% to 5%. Privacy-focused ZEC added 7%.
Major coins continue to see choppy trading ahead of the release of U.S. consumer price index on Wednesday, which is forecast to show the cost of living rose to an annualized 7% in December. An above-forecast print would validate Fed's hawkish stance and may bring more pain for asset prices, in general.
What's driving ETH's volatility expectations lower?
The growth of decentralized option vaults seems to be one of the major factors driving the implied volatility lower.
"The most obvious explanation for this phenomenon in ETH vols is the sudden influx of altcoin vol supply from the DeFi Options Vaults (DOVs) especially with the launch of three Solana-based DOVs in the last two weeks," Singapore-based QCP Capital said in a Telegram broadcast last week. "With no vol market for the altcoins, market makers resort to selling ETH vol as a proxy hedge for their altcoin gamma positions (short-tenor options)."
In other words, market makers buying altcoin options via decentralized finance (DeFi) option vaults run by Ribbon Finance, StakeDAO and others have been selling ether options on centralized exchanges to neutralize their bullish altcoin exposure and keep their books market neutral.  Chart showing the recent dramatic decline in ether's one-month implied volatility (Skew) DeFi options vaults are fast becoming the go-to place to bet on or hedge exposure in alternative cryptocurrencies as top centralized exchanges like Deribit remain fixated on bitcoin and ether.
The total value locked in the DeFi option protocols more than tripled to over $700 million in the final quarter of 2021, according to data source DeFi Llama.
QCP, which runs a book in excess of $2 billion across exchanges, over-the-counter platforms and DeFi, traded $1 million worth of options tied to the AAVE token with Ribbon Finance and $1 million in LUNA options on ThetaNuts Finance.
Ribbon Finance, the largest options protocol, now does a monthly notional volume of about $1 billion, the protocol's CEO Julian Koh told CoinDesk in a Telegram chat.
Structured products like covered calls and puts offered by the DeFi option vaults allow retail traders to participate and earn yield in the notoriously complex cryptocurrency options market, as discussed here.
The strategies are automated. Users deposit their coins into the strategy vaults, which take care of the complexities, like selecting the appropriate strike price for selling weekly options.
A Message from Grayscale  Looking to diversify your portfolio beyond Bitcoin and Ethereum?
As the world's largest digital currency asset manager, Grayscale provides exposure to a variety of digital currencies through familiar investment vehicles accessed conveniently in brokerage accounts.
Grayscale® Zcash Trust, symbol: ZCSH, offers investors exposure to a digital currency that expands upon the capabilities of Bitcoin, with a core focus on building a secure and permissionless financial network that preserves financial privacy.
Created by a team of world-class cryptographers, engineers, and computer scientists, Zcash seeks to offer long-term investability by preserving many of the same principles that have made Bitcoin successful.
Access Grayscale® ZCash Trust by typing symbol: ZCSH into your brokerage account. Learn more at https://grayscale.com/ZCSH.
Crypto Prices Bitcoin (BTC) See the latest price here Ether (ETH) See the latest price here The following are the biggest movers in the CoinDesk 20 digital assets over the past 24 hours: Biggest Gainers:
Biggest Losers:
Sector classifications are provided via the Digital Asset Classification Standard (DACS), developed by CoinDesk Indices to provide a reliable, comprehensive, and standardized classification system for digital assets. The CoinDesk 20 is a ranking of the largest digital assets by volume on trusted exchanges.
A Message from Brave  Brave Wallet is the first secure crypto wallet built natively in a web3 browser. No extensions required.
Store, manage, and grow your portfolio, get NFT & multi-chain support. Even connect other wallets and DApps. All from the security of the best privacy browser on the market.
Whether you're new to crypto, or a seasoned pro, it's time to ditch those risky extensions. It's time to switch to Brave Wallet.
Latest Headlines
 New Money, a new series by CoinDesk, explores what it means to be part of the new "creator economy." In the talk show hosted by Spencer Dinwiddie and Solo Ceesay, we hear from pro athletes, celebrities and social media influencers who are on the cutting edge of interacting directly with fans and developing new ways to generate revenue from their own celebrity. Learn more here.
Technician's Take By Omkar Godbole Ether May Continue to Underperform Bitcoin  Chart showing ether-bitcoin's failed breakout (Source: TradingView) Ether-bitcoin fell 7% last week, negating the bullish symmetrical triangle breakout confirmed in early December.
A failed breakout often presages notable drawdowns, meaning ether might be staring at a prolonged underperformance relative to bitcoin.
ICYMI In case you missed it, here are the most recent episodes of "First Mover" on CoinDesk TV: US Economy Added Fewer Jobs in December Than Expected, Paul Brody on Why He Thinks 2022 Is the Year of Ethereum and More "First Mover" hosts speak to Ernst & Young Principal & Global Innovation Leader Paul Brody about his outlook for Ethereum in 2022 and some of the key issues that need to be addressed. Looking at the markets, the U.S. economy added 199K jobs last month, fewer than expected. Ben McMillan, CIO of IDX Digital Assets, shares his view on the crypto markets and the impact of macro factors. Plus, Open Earth Foundation Executive Director Martin Wainstein shares insights into utilizing NFT art to help tackle climate change.
Disclaimer: The information presented in this message is intended as a news item that provides a brief summary of various events and developments that affect, or that might in the future affect, the value of one or more of the cryptocurrencies described above. The information contained in this message, and any information liked through the items contained herein, is not intended to provide sufficient information to form the basis for an investment decision. The information presented herein is accurate only as of its date, and it was not prepared by a research analyst or other investment professional. You should seek additional information regarding the merits and risks of investing in any cryptocurrency before deciding to purchase or sell any such instruments.
First Mover A newsletter from CoinDesk Were you forwarded this newsletter? Sign up here. Copyright © 2021 CoinDesk, All rights reserved. 250 Park Avenue South New York, NY 10003, USA Manage your newsletter subscriptions | Unsubscribe from all CoinDesk email |
