A 16.58% rally tempts a collateral lender to loosen terms it set for the fall
Should the lender relax its ETH collateral margin requirement after a week that lifted collateral coverage, or keep the terms, given a 25.59% week range and a worst day of -3.32%?
The market facts are real; the decision maker is illustrative.
The week and the position
In the week of 24 October 2022, ETH rose 16.58%, from 1,364.19 to 1,590.44, closing in the upper third of a 25.59% range with volume above its prior 12-week average. The best day gained 8.64%, the worst lost 3.32%, and the largest one-hour move was 3.76%. ETH outperformed BTC by 11.18 percentage points, with hourly correlation at 0.9. The market remained 67.19% below its 52-week high, and annualised realised volatility was 71.4%. An illustrative lender holds ETH-backed loans against a fixed liquidation trigger.
Judgment
Rising collateral values raise coverage ratios, but they do not reduce the speed at which ETH can fall back through a trigger. Keep the margin requirement and trigger unchanged for loans in ETH terms; the 3.32% worst day and 71.4% realised volatility describe the downside the terms must survive, not the direction of one week. For loans effectively denominated against BTC, tighten the requirement, because ETH's 16.58% weekly gain exceeded BTC's by 11.18 percentage points at 0.9 hourly correlation, so ETH collateral's value against a BTC-denominated loan shifted within one week and the two did not move by the same magnitude. Accept lower new loan volume this way.
What would change it
If realised volatility and the worst-day and worst-hour moves stay near this week's levels for several consecutive weeks, the ETH-term margin can be reviewed downward. If ETH's gains or losses over several weeks track BTC's within a few percentage points, the tighter BTC-denominated requirement can be relaxed.
What sets this case apart
The week is a rally, so the question is whether an up move justifies loosening protection; the answer rests on downside speed, not on the direction of collateral prices.