Bitfinex Alpha | US Economy Confounds Policy Makers, and Crypto Options Market Prices in Increased Volatility

The United States finds itself in an extraordinary economic environment, where recession indicators continue to flash red, interest rates are at their highest point in 16 years, inflation remains a persistent concern, yet the services sector of the economy and the job market continue to demonstrate a surprising level of resilience.

The S&P Global Flash Composite PMI saw its sharpest increase since April 2022, as consumer spending continued unabated. 

US GDP for the first quarter also saw a significant upward revision, and the latest weekly job market report showed many lower-than-expected jobless claims as strong demand for workers persists.

It remains surprising how US consumers continue to sustain the economy and stave off a recession despite persistent inflationary pressures. The latest Personal Consumption Expenditures (PCE) report, the Federal Reserve’s preferred inflation metric, showed just how challenging the policy environment is as consumers continue to spend on travel, leisure and other service sectors of the economy.

Reading the minutes from the May meeting of the Federal Open Market Committee, it is clear that opinions over how to tackle inflation are divided. Some policy-makers have clearly indicated that rates should pause; others are not so sure and have emphasised the need to thoroughly assess all economic data, acknowledging that uncertainties will persist until they reconvene.

Against this macro backdrop, the crypto options market has been providing an interesting picture of how traders – particularly institutions – have been positioning themselves.

Despite a major $2.3 billion expiry of Bitcoin options for May, amounting to 26 percent of all open interest on Deribit, the underlying market was largely unperturbed, with volatility being seen as muted in the near term. However, this is not expected to continue and events such as the Bitcoin halving next year or the 2024 US Presidential elections are expected to inject renewed volatility into the market.

Traders are keenly monitoring the June options expiry, anticipating potential turbulence in the market. Even as we approach the expiry, the options market already seems to have influenced market sentiments, as evidenced by the shift in the Put/Call ratio and skew. The net put/call ratio for Bitcoin options has increased to almost 0.5, indicating that more options traders are becoming bearish. 

There are equally interesting dynamics taking place in Ethereum, where the introduction of proto-danksharding is a potential game-changer that could slash Layer 2 (L2) transaction costs by a factor of ten. This breakthrough, set to augment the adoption of L2s, could inject new vigour into the currently subdued Ether markets.

On the crypto news agenda, there is, as usual, some good news and less good news.

On the positive side, Hong Kong has positioned itself as a new digital asset hub by reopening trading to retail investors, in contrast to the rest of China.  

FTX is also looking to potentially revive itself with the launch of FTX 2.0, and CEO, John Ray has been working on a reboot plan in meetings with creditors and debtors.

Less positively, it appears that Digital Currency Group (DCG) has missed a $630 million loan repayment to its subsidiary, Genesis, which has, in turn, heightened the financial dispute that DCG has with Gemini, who used Genesis for its ‘Earn’ product. The resolution of the dispute remains uncertain, but Gemini and other parties have proposed an amended reorganisation plan with Genesis that doesn’t require DCG’s approval.

Hotbit Exchange also announced that due to cash flow issues, it is halting operations, and after a tumultuous launch of Ledger Recover, the self-custody solution provider Ledger has postponed the release of its Ledger Recover feature after facing criticism from the community regarding the potential sharing of seed phrases and the currently closed-source nature of the code. Ledger has committed to open-source the code before releasing the feature.

Have a good trading week!

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