Significant Spike in Ether Volatility
Ether (ETH), the second-largest cryptocurrency by market capitalization, experienced a dramatic increase in volatility early Monday. This surge was primarily driven by escalating trade tensions between the U.S. and its global trading partners, which instigated a wave of risk aversion throughout the financial markets.
Price Drop and Exchange Discrepancies
The value of ether plummeted by as much as 24%, resulting in considerable discrepancies across various centralized exchanges. On Deribit, the price hit a low of $2,065, while Kraken reported a price of $2,127 and Coinbase saw it drop to $2,150. These figures marked the lowest levels since the crash on August 5, according to data from TradingView and CoinDesk.
CryptoQuant highlighted that this decline represented the largest drop in ether’s value since May 19, 2021. Over a three-day period, the token associated with the Ethereum blockchain lost a total of 23%, marking its most significant downturn since November 2022. Comparatively, Bitcoin (BTC) experienced a milder decline of just over 5%, settling at $91,200.
Soaring Volatility Metrics
As the price of ether fell, its one-day at-the-money volatility surged from an annualized 34% to an astonishing 184%, based on options data from Deribit tracked by Presto Research. Additionally, the DVOL index on Deribit, which measures anticipated price fluctuations for the upcoming four weeks, jumped to 101% from approximately 67%, according to TradingView data.
This volatility spike was further fueled by traders rushing to acquire ETH put options, which provide a safety net against further downside risks. Min Jung, an analyst at Presto Research, noted that the ETH perpetual prices on Deribit plummeted from $3,285 to $2,065, prompting a significant reallocation in market positioning. The put-call ratio soared from a relatively calm 0.6 last week to over 2.5, indicating a strong demand for downside protection among traders.
At one point, risk reversals, which assess the implied volatility premium for calls compared to puts, displayed negative values exceeding 10%. This pointed to an unusual preference for puts, signaling heightened anxiety within the market.
Market Makers and Their Impact on Volatility
The increased volatility was partly attributed to market makers withdrawing liquidity, a common occurrence during periods of heightened trading activity. Griffin Ardern, head of options trading and research at BloFin, explained that some market makers opted to step back from the market amid high volatility, which in turn impacted options pricing.
Markus Thielen, head of 10x Research, added that delta hedging actions by market makers contributed to the downward pressure on ETH prices. As market makers and exchanges rushed to offload futures, they sold at any available bid, further intensifying the sell-off. Market makers play a crucial role in maintaining order book liquidity and typically aim to keep a net market-neutral exposure by continuously buying and selling futures. Their actions can amplify market momentum, particularly when they hold a short gamma exposure.
Trade War Fears and Broader Market Impact
The rapid decline in ether prices has sparked speculation that a large fund or trader with ETH-margined positions in derivatives or decentralized finance (DeFi) was liquidated, leading to an exaggerated price drop.
More broadly, the ETH sell-off and the downturn in the overall market can be traced back to renewed trade war tensions involving the U.S., Canada, Mexico, and China. Concerns over these trade disputes have raised fears of inflation in the global economy, complicating the ability of central banks, including the Federal Reserve, to lower interest rates and support economic growth.
Traditional markets were also affected by these anxieties, with Dow futures dropping more than 650 points early on Monday. European stock futures followed suit, reflecting a broader trend of uncertainty and volatility in the financial landscape.
