Why a Year-End Crypto 'Santa Rally' Appears Unlikely in 2025

The crypto market has long been a stage for speculative fervor, with year-end "Santa rallies" historically driven by retail optimism and seasonal liquidity. However, as 2025 draws to a close, derivatives market data from Bybit and Block Scholes paints a starkly different picture. Open interest, funding rates, volatility smiles, and risk appetite indices all signal entrenched bearish positioning and muted retail participation, casting doubt on the likelihood of a traditional December surge.

Bearish Positioning in Perpetual Swap Markets

Open interest in crypto derivatives remains a critical barometer of market sentiment. As of Q4 2025, open interest in perpetual swap contracts has stagnated, remaining significantly below pre-October 10 levels. This flat trajectory suggests traders are avoiding leveraged positions, a stark contrast to the aggressive long-biased activity typically seen ahead of year-end.

The reluctance to re-enter leveraged bets is further underscored by funding rate dynamics: while BTC perpetuals show flat funding rates, blue-chip altcoins like ETH and SOL are trading at negative funding rates. Negative funding rates for altcoins indicate a structural bearish bias, as short-sellers dominate positioning and longs retreat.

Volatility Smiles Reflect Deep Pessimism

Options markets, often a leading indicator of risk appetite, also reveal a bearish tilt. Volatility smiles for both BTC and ETH exhibit a pronounced skew, with out-of-the-money (OTM) puts priced at a 5% premium over calls across short- and long-dated options. This asymmetry reflects heightened demand for downside protection, as traders hedge against potential further selloffs. Such a skew is inconsistent with the bullish expectations typically associated with a Santa rally, where OTM call premiums would dominate.

Risk Appetite Remains Constrained

Block Scholes' Risk Appetite Index, which aggregates derivatives data to gauge market sentiment, underscores the cautious outlook. Despite minor spot price rebounds, the index remains in a "cautious optimism" range, far from bullish territory. This is partly due to major crypto assets trading 28% or more below their all-time highs, a psychological barrier that has dampened speculative enthusiasm. Retail participation, in particular, has been muted, with traders prioritizing hedging over directional bets.

Macroeconomic Headwinds and Derivatives Inaction

The final Federal Open Market Committee (FOMC) meeting of 2025, which delivered a 25bps rate cut, failed to spark meaningful derivatives activity. Traders have instead continued to price in downside protection, avoiding large directional positions despite the Fed's dovish pivot. This apathy reflects broader macroeconomic constraints, including lingering effects from the October 10 liquidation event, which eroded confidence in leveraged strategies.

Conclusion: A Cautious Close to 2025

The derivatives market's collective signals-flat open interest, bearish funding rates, skewed volatility smiles, and a risk appetite index stuck in neutral-paint a compelling case for a weak year-end close. While spot prices may see minor seasonal gains, the absence of retail-driven optimism and the persistence of hedging activity suggest a Santa rally is improbable. For investors, the data underscores the importance of prioritizing risk management over speculative bets in the final stretch of 2025.