Ethereum ETFs Maintain 2025 Inflow Streak Amid 7% Volatility Surge

The recent downgrade of the IBIT index from a buy to a hold rating reflects a cautious stance due to the lack of momentum and the absence of a breakout above the May highs. Despite strong year-to-date returns, the index has shown signs of consolidation, indicating a period of patience is needed for investors. The market sentiment for the second-largest cryptocurrency, Ethereum, remains extremely bullish, with ETH Spot ETFs maintaining their longest inflow streak of 2025 and short-tenor volatility smiles surging as high as 7%. This renewed optimism in ETH is driven by several factors, including the market's anticipation of the Pectra upgrade, which aims to enhance network scalability, staking efficiency, and user experience. The upgrade includes technical improvements such as validator consolidation and streamlined withdrawal mechanisms, which could attract more staking participation and increase Layer 2 adoption.

The market has also seen a shift in sentiment due to the conflict in the Middle East, which has left its mark on the trading volume of perpetual swap contracts and funding rates. The conflict has resulted in a sea of red for crypto assets, with BTC down more than 4%, ETH more than 8%, and SOL 10%. However, ETH options markets are carrying a less bearish tilt toward out-of-the-money puts relative to BTC short-tenor options, and for expirations beyond 30 days, the ETH put-call skew is positive. This suggests that while there is some bearish sentiment, there is also a level of optimism in the market.

The market has also seen a public feud between President Trump and Tesla CEO Elon Musk, which had a minimal impact on perpetual funding rate markets but resulted in a temporary sea of red in crypto spot markets. This did not last long, as BTC is now trading only $2K shy of its all-time high of $111K, though its options markets are neutral to slightly bullish. This contrasts significantly with ETH options markets, in which short-tenor volatility smiles skewed more than 10% toward out-of-the-money calls earlier today, as ETH’s spot price has outperformed over the past seven days as well.

The market has also seen a period of sideways spot price activity, which has led both BTC and ETH to trade within their respective bounds. In response, their respective implied volatility levels continued dropping off for most of the past seven days before each bounced off its own 18-month floor after it was announced that the US and China would be having their first trade talk following a long game of cat and mouse, which saw neither side back down. In turn, we saw a near recovery of ETH skew from out-of-the-money puts and a bullish bounce toward calls from neutral levels for BTC.

Despite this, activity in derivatives markets has remained low, with funding rates for major tokens BTC, ETH, and SOL having been consistently negative over this period. However, the demand for short-dated options, which was particularly strong in protection against further downside moves, has fallen alongside an end to the high level of realized volatility that has dominated markets over the past month. The market has also seen a period of high volatility, with BTC's spot price failing to hold at its all-time high of $111K for a sustained period of time, resulting in a shift in the sentiment of options markets. The bullish skew that was apparent in volatility smiles across the term structure has abated, with short-tenor options skewing briefly toward out-of-the-money puts before returning to neutral. ETH’s term structure of volatility is no longer disinverted, with volatility expectations across tenors compressed. Short-tenor skew for ETH is pointed toward out-of-the-money puts, though ETH funding rates are exhibiting more bullish sentiment than indicated by options markets.

The market has also seen a period of high volatility, with BTC's march to a new all-time high on May 22, 2025, followed by a period notable largely for its lack of volatility. Realized volatility has fallen across cryptocurrencies, causing a corresponding drop in short-dated implied volatility. For ETH, that’s resulted in a flat term structure, while for BTC it’s caused a reasonably strong steepening as the 7-day tenor has fallen back below 40%. Options and futures markets have expressed bullish sentiment throughout the past week, with positive futures yields and funding rates and a skew toward out-of-the-money calls. However, a downturn in BTC’s spot price on May 28, 2025, has clouded the picture somewhat in funding rates.

The market has also seen a period of high volatility, with BTC's front-end volatility being reactive to the whipsaw in spot price over the past week, which has more recently resulted in BTC reaching a new all-time high of $111.97K – the first new all-time high since January 20, 2025, four months ago. At-the-money implied volatility levels remain between 45% and 50%, as short-tenor volatility expectations have now picked up significantly from their lows of last week. Perpetual funding rates remain tempered despite a spot price that has reached new highs, although options skew temporarily steepened towards calls by as much as 7%, due to renewed demand for out-of-the-money calls.