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.
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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 because 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.”
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, Markets Reporter
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 bitcoin's recent rally has been primarily fueled by the broad-based sell-off in the dollar.
- Omkar Godbole, Markets Reporter
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