ETH Market Rocked by Renewed Trade War Fears as Volatility Spikes

Ether (ETH), the second-largest cryptocurrency by market value, witnessed a significant spike in volatility early Monday as the renewed trade war between the U.S. and its trading partners triggered broad-based risk aversion in financial markets.

The price of ether (ETH) dropped sharply on Monday, hitting a low of $2,065 on Deribit, a cryptocurrency derivatives exchange. This marked a drop of 24% from the last reported price of $2,716 on Friday, according to TradingView data.

The price of ether on other centralized exchanges also showed significant dislocations. On Kraken, the price hit a low of $2,127, while on Coinbase (COIN) it reached $2,150, as per CoinDesk's own tracking. This is the lowest price for ether since the Aug. 5 crash, according to TradingView and CoinDesk data.

The volatility in ether prices was also evident in the Deribit ether DVOL index, which measures the expected price turbulence over the coming four weeks. The index surged to 101% from 67% on Friday, according to TradingView data. This indicates a sharp increase in the market's anticipation of future price volatility.

One-day at-the-money ether volatility also jumped from an annualized 34% to 184% as the price dropped sharply, according to Deribit's ether options data, which is tracked by Presto Research. This shows that the rapid price decline was accompanied by a surge in implied volatility.

The steep sell-off in ether prompted traders to snap up ETH put options, which offer downside protection, according to Presto Research.

"The move, which saw ETH perp prices on Deribit plunge from $3,285 to $2,065, has triggered a significant shift in market positioning," Rick Maeday, an analyst at Presto Research, told CoinDesk.

"This is evidenced by the put-call ratio surging from last week's relatively calm 0.6 to above 2.5 today - indicating a rush for downside protection among market participants."

At one point, risk reversals, which measure implied volatility premium (demand) for calls relative to puts, flashed negative values over 10%, an unusually strong bias for puts, Deribit data showed.

The sharp sell-off in ether also led to market makers pulling out liquidity, which partly contributed to the price dislocations, according to Griffin Ardern, head of options trading and research at crypto financial platform BloFin.

"Some market makers chose to withdraw liquidity under high volatility, and their risk-averse behavior affects options pricing," Ardern told CoinDesk.

"For example, Deribit's ether IVs [implied volatilities] are typically lower than other exchanges, but they were higher on Monday morning."

According to Markus Thielen, head of 10x Research, delta hedging by market makers added to the downside volatility in ETH.

"As market makers and exchanges scrambled to offload futures, they sold at any available bid, accelerating the sell-off," wrote Thielen in a Monday note to clients.

"This behavior is evident in the steepening backwardation, which reached $1,343 for the December-March futures spread, the highest since ether's 2023 bull market began."

Market makers are supposed to create order book liquidity and make money from the bid-ask spread. They are price agnostic and strive to maintain a net market (delta) neutral exposure through constantly buying/selling futures. They typically sell into weakness or buy into strength, adding to the momentum, when holding a short gamma exposure.

The pace of the ether price sell-off has led to speculation that a large fund/trader ETH-margined positioned in derivatives or DeFi was liquidated, leading to an exaggerated price slide.

Broadly speaking, however, the slide in ETH and the broader market looks to have been spurred by the renewed trade war between the U.S. and Canada, Mexico and China. The concern is that it would inject inflation into the global economy, making it harder for central banks, including the Fed, to continue lowering interest rates to support economic growth.

Traditional markets suffered on the back of these concerns as well. Dow futures dropped more than 650 points early today, with European stock futures following suit alongside an uptick in the dollar.