Over the last few days, bitcoin and other crypto assets witnessed a steady but cautious recovery from the extreme bearishness seen last week. The broader crypto market staged a gradual recovery after many assets plummeted to levels not seen in seven months.
As expected, the recent sell-off affected the derivatives market. However, as the market is recovering, derivatives contracts are also stabilizing. The crypto exchange Bybit has published a report in collaboration with the data and analytics platform Block Scholes, revealing how well the derivatives market is improving.
Gradual Recovery in Derivatives Market
According to the report, BTC and ETH have bounced back to levels above $92,000 and $3,000, respectively. Their recovery comes alongside improved global risk appetite, investor sentiment, and positive macroeconomic signals. Although participation rates in derivatives have remained low since the October 10 liquidation event, BTC and ETH perpetual swaps have recorded several sessions of positive rates this week.
While BTC and ETH perpetuals funding rates remained positive throughout the sell-off, altcoin rates underperformed. BTC and ETH have seen consistently positive rates over the last two weeks, but last weekend’s sell-off saw altcoin pairs pay extra for leveraged short exposure.
Following that incident, open interest and volumes have remained relatively low across altcoin derivatives instruments. However, analysts found that short-term implied volatility levels indicate that traders have priced out their most extreme fears of further downside in the short term.
“Short-tenor implied volatility levels no longer trade at such an extreme premium after the normalization of the term structure of volatility, and puts no longer hold as strong a premium above calls (despite not fully pricing out a preference for downside protection),” the report stated.
Positive Macroeconomic Landscape
The reaction in altcoin derivatives instruments last weekend suggested relatively high demand for short exposure to profit from further downside price movement. On the other hand, options saw a slight reduction in the skew towards puts.
Large market cap altcoins that improved the most during this week’s slow-and-steady recovery include Solana (SOL), Toncoin (TON), Cardano (ADA), and Curve DAO (CRV). These assets recorded significant open interest in perpetual swaps.
Meanwhile, the recovery in crypto assets has coincided with a positive trend in the macroeconomic landscape. The S&P 500 index recorded some upward movement, and the end of the U.S. government shutdown has cleared some of the fog clouding the Fed’s judgment ahead of the upcoming FOMC meeting. There is a high chance the next meeting will end with a 25 bps cut, possibly triggering a BTC rally.