Bitcoin is down in early trading Tuesday, diverging from European stocks and U.S. stock futures. Prices for the largest cryptocurrency are struggling to push past $12,000 but appear supported around $11,450.
The success of DeFi on the Ethereum blockchain has brought another consequence for traders besides high congestion and elevated transaction fees: Rising volatility in prices for the blockchain's native token, ether.
What's Hot: S&P 500 at highest valuation since dot-com era, FTX launches Uniswap Index futures and bitcoin's "rich list" grows.
PRICE POINT
Bitcoin was down 1.6% in early trading Tuesday to about $11,575.
Stocks in Asia and Europe rose on optimism as some investors turned more optimistic on the economy recovery, and as the U.S. and China reaffirmed a commitment to a phase-one trade deal.
Cryptocurrency analysts say prices are struggling to break above $12,000, but there appears to be support around $11,450.
U.S. Federal Reserve Chair Jerome Powell is expected to bolster expectations of inflation during his keynote speech at the Jackson Hole Economic Policy Symposium on Thursday. According to analysts speaking to CoinDesk, that could ultimately lead to a drop in the dollar and greater buying power for bitcoin traders and investors. Read more about that below in Bitcoin Watch.
MARKET MOVES
The explosive growth of decentralized finance, or DeFi, on the Ethereum blockchain has brought unwanted attention to the recent surge in congestion on the network, with a resulting jump in transaction fees.
There's another consequence for crypto traders: Rising volatility in prices for ether, the blockchain's native cryptocurrency. That's especially true when ether's volatility is compared with that of bitcoin.
The three-month spread between ether's implied volatility and bitcoin's has increased to 29%, the highest in six months, according to data source Skew. As recently as June 28, the spread was as low of -2.8%, meaning bitcoin had the higher implied volatility at that point.
Volatility often carries a negative connotation, since traders often consider it a barometer of risk. In this case the rising spread appears to indicate a wide range of expectations in how DeFi might ultimately affect usage of the Ethereum network and demand for the ether.
“Ether's rising volatility is a byproduct of its own success," Denis Vinokourov, head of research at Bequant, a London-based cryptocurrency exchange and institutional brokerage, said in a Telegram chat. "Success comes with risks, the need to hedge.”
Spread of ether's implied volatility over bitcoin's. (Skew)
Implied volatility represents the market's expectations of how volatile or risky an asset would be over a specific period. It's not necessarily bullish or bearish: Heightened implied volatility simply means that future price swings might lie ahead.
“Investors are focused on DeFi and mindful of a potential big move in ETH," Emmanuel Goh, CEO of the crypto-derivatives data firm Skew, told CoinDesk in a Telegram chat.
DeFi tokens have been among the hottest performers in cryptocurrency markets this year, with steep rallies in Chainlink’s LINK and the Kyber Network’s KNC. The open-source lending protocol Aave's LEND token has risen more than 30-fold.
The Ethereum network's recent spell of congestion has pushed the average transaction fee to record highs above $6.
The heightened volatility expectations might also be an indication of how volatile prices have been this year for ether itself. The second-largest cryptocurrency has tripled, gaining on bitcoin, which is up a respectable 64%.
Demand for options, or the need to hedge, tends to pick up with price rallies and major fundamental developments, and implied volatilities are primarily driven by the net buying pressure for options contracts like price calls and puts.
This is what success looks like right now for Ethereum.
- Omkar Godbole
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Despite the recent pullback in bitcoin prices, analysts are still bullish in the long term, with Federal Reserve Chair Jerome Powell expected to bolster inflation expectations in a highly anticipated speech Thursday.
“Powell has previously stated that he doesn't think inflation is a significant risk and is prepared to see it overshoot to meet his objectives,” Charlie Morris, chief investment officer at ByteTree Asset Management, told CoinDesk in a WhatsApp chat.
“The major impact for crypto out of this symposium would be a change in monetary policy and further depreciation of the dollar, which could propel bitcoin higher,” said Matthew Dibb, co-founder of Stack.
Multiple rejections above $12,000 seen over the past three weeks have put brakes on the rally from July lows below $9,000.
A deeper pullback may be seen if the immediate support at $11,000 is breached, according to analysts at Stack, a provider of cryptocurrency trackers and index futures.
The 10-year breakeven rate, which measures the inflation expectations, has risen to pre-Covid levels above 1.6% from the low of 0.5% observed during the March crash.
Bitcoin has pretty much tracked inflation expectations higher over the past five months, while the dollar index has declined by nearly 10%.
The cryptocurrency has witnessed bigger year-to-date gains in the U.S. dollar terms, compared to the rally seen in terms of other currencies like the euro and the Japanese yen.
The data suggests that bitcoin's recent rally has been primarily fueled by the broad-based sell-off in the dollar.
Bitcoin vs 10-year breakeven rate (Federal Reserve Bank of St. Louis)
– Omkar Godbole
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