Crypto holds up so far despite ongoing Middle East conflict

Despite escalating geopolitical tensions, crypto-asset spot prices have shown a sustained recovery in sentiment, with BTC briefly breaching $74K and  ETH flirting with $2,200. 

Overcoming a brief wick below $63K and $1,800 following the initial strikes ...

BTC and ETH spot prices have respectively shown significant resilience, amidst the worsened macro and geopolitical backdrop.

Demand for optionality ticked up following President Trump’s weekend announcement that the US had launched airstrikes against Iran, with the latter then retaliating across the Gulf region – which moderately inverted the term structure of volatility, though absolute implied volatility levels remain far lower than their highs in early February. Relative to delivered volatility, implied volatility is also trading lower, and the skew towards OTM puts is no longer as strong as it was.

Additionally, Spot Bitcoin ETFs have also showed tentative signs of a rebound in sentiment – the first three trading days of March has seen Spot Bitcoin ETFs hoover up $1.145B worth of bitcoins, while Strategy (the largest Bitcoin digital asset treasury firm) bought $204M worth of bitcoins last week, marking the firm’s largest purchase since late January.

For most of the past week and particularly in the immediate aftermath of Trump’s airstrike announcement, funding rates indicated that the selloff in altcoins may have been driven more by selling in perpetual futures markets rather than spot markets.

BTC, ETH and SOL funding rates all turned negative over the weekend as Iran almost immediately responded to US missiles.

For BTC however, funding rates quickly recovered back to neutral levels.

ETH funding rates on the other hand took a second leg lower, before reaching neutral levels at a lag to BTC, while funding in SOL has mostly been negative.

Negative funding rates indicate futures prices traded below spot prices, with short traders willing to pay a premium to hold their positions — at the start of the Middle East war, that sentiment was visibly more bearish in altcoins than in BTC.

Options markets have shown a similar resilience.

Traders bid up optionality immediately after the US airstrikes were confirmed, pushing short-term implied volatility to 60%. That resulted in a modest inversion of the term structure of volatility which has since alleviated slightly.

However, despite the nature and severity of the attacks, demand for optionality remains significantly lower than in early February. This time last month, short-tenor implied volatility rose to its highest (100%) since the depths of the 2022 bear market, as BTC fell towards $60K.

The ongoing war has so far not seen optionality demand return to those levels.

In fact, back in early February, the volatility implied by options prices far exceeded the volatility that had been delivered in spot prices – a sign that traders were in a deep rush for downside protection.

Currently, despite ATM implied volatility following a move higher up in realized volatility, IV remains lower than realized volatility at both short-and mid-dated tenors.

BTC option markets volatility smiles also show some of the bearishness having been priced out. As spot price revisited $63K, put options traded with a 15 vol point premium over calls (traders looking for downside protection).

However, similar to the recovery in spot price, 25-delta put-call skew quickly bounced off its lows.

Despite that bounce, make no mistake – options markets are still bearishly positioned across the volatility surface. However, they are still less bearish than during the weekend when the US-Israel strikes began.