Derivatives Data Shows Softening Crypto Enthusiasm
  Insights, news and analysis for the professional investor January 16, 2022 Sponsored by  Prices as of 1/16/22 @ 14:45 p.m. UTC If you were forwarded this newsletter and would like to receive it, sign up here.
Welcome to Crypto Long & Short. It was a quiet week, not counting the fact that Fed Chair Jerome Powell indicated to Congress that inflation is a big concern and that rate hikes and/or the Fed unwinding part of its balance sheet may be on tap for this year. That sent U.S. stocks up and buoyed crypto a little bit, but in the end, market volumes just aren't what they used to be.
– Lawrence Lewitinn, managing editor for global capital markets
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The Briefing Several months ago, investors facing FOMO – the fear of missing out – worried that the ship had sailed when it came to crypto. Now, however, while that ship may have left the harbor, the wind is out of its sails as it floats directionless for the time being. Perhaps it's because of upcoming Fed tightening; enthusiasm seems to have dampened. That sentiment is backed up by some market data showing market activity has fallen and that could take prices with it.
1. Funding rates have gone negative.
Rates from several major exchanges compiled by analytics firm CryptoQuant show that the cost of borrowing to buy crypto on leverage has fallen to the point where it's slightly negative. That implies that demand for money to make leveraged bets has taken a hit. Traders aren't in any rush to add to their positions.
2. Open interest (OI) in bitcoin futures is down slightly since the last week of December.
It's currently $16 billion, according to data site Skew.com, down from just shy of $19 billion around Christmastime. During bitcoin's November peak, open interest was roughly $26 billion.
3. Ether futures also have seen declining open interest.
Since its own November peak of $13 billion, open interest for the smaller ether futures market is currently around $8 billion.
4. Options open interest on bitcoin and ether are down to where they were in early October.
OI for bitcoin options is now at $7 billion and $5 billion for ether. Back in December, those figures were around north of $10 billion and $7 billion, respectively.
Some of the falloff can be attributed to year-end bets taken throughout the course of 2021. While current OIs are still significantly larger for both cryptocurrencies than where they were last year, they are still roughly where things were in October, before the big run-up in prices.
5. Implied volatilities on bitcoin are falling precipitously.
Implied vols, which are calculated off options premiums and gauge the market's view of future risk, are down to levels not seen since October 2020. To be sure, regular levels in crypto implied volatilities would signal alarm and panic in the equity market, but since the second week of December, crypto's implied vols have drifted down. In the past couple of days, that drop has accelerated. One-month at-the-money implied vols are now at 60%; they had been hovering in the 80% range since the summer. When demand for options falls, implied volatilities fall with it.
6. Ether's implied vols are also down.
Now at 69%, implied volatilities on one-month at-the-money options on ETH had been around the 100% level since June. It has been over a year since they were regularly below 70%.
The list goes on and on.
Of course, this doesn't mean muted markets can last forever, but in the coming days or weeks, one shouldn't be surprised if prices drift south.
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Chain Links Coinbase bought FairX in a move to make derivatives trading available to U.S. customers. TAKEAWAY: Crypto derivatives have been largely withheld from U.S. investors over the past several years. However, increasing volume in the overall market has led exchange giants like Coinbase and FTX to seek out acquisitions that will allow them to offer futures and other derivatives products.
Brazilians further adopted dollar-pegged crypto assets during 2021, nearly tripling stablecoin trade volume from the previous year. TAKEAWAY: Holding stablecoins has proven to be an effective method for getting exposure to the U.S. dollar, especially during times of high inflation. Brazilian citizens noted that stablecoins have more agility and less bureaucracy than other forms of U.S. dollar exposure, allowing them to buy, trade and send the assets with relatively low fees. Stablecoin adoption may further strengthen the dollar's role as a world reserve currency.
The U.S. inflation rate continued to rise as the Consumer Price Index was 7% higher year over year in December. TAKEAWAY: 2021 was notably a year of low interest rates and high inflation, as December marked the largest jump in CPI since 1982. The announcement seemed to be priced into markets as crypto and equities continued a small recovery later during the day, but bitcoin remains unproven as a hedge against inflation.
Billionaire investor Bill Miller announced that 50% of his personal wealth is now in bitcoin. TAKEAWAY: Miller, who is known for outperforming the S&P 500 15 years in a row, has previously invested in bitcoin through funds that he managed. However, the investor announced he has been accumulating the asset with a majority of his personal holdings and recommends other investors to have at least 1% of their assets in BTC.
Fidelity Digital Assets predicts game theory will come into play with sovereign nations looking to accumulate bitcoin. TAKEAWAY: While owning bitcoin now may appear to be a speculative bet and a risky position, further adoption could increase the risks of having no exposure. High inflation environments around the world have led many investors to lose (at least a little) faith in fiat currency and look for alternative stores of value, which may lead to central bank accumulation of digital assets.
– Teddy Oosterbaan, research analyst
 2021 was an extraordinary year for the cryptocurrency and blockchain industry. Bitcoin and ether prices touched all-time highs; traditional businesses bought NFTs like CryptoPunks and Bored Apes; China banned bitcoin mining and it survived. Thanks to all of this, most people have at least heard of crypto by now. In the CoinDesk 2021 Annual Crypto Review, CoinDesk Research summarizes the key themes and metrics that highlight the year's progress in cryptocurrency markets. Read the report here.
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