Markets
Bitcoin’s pullback from $70,000 is characterized by ‘flight lethargy’
Experienced stock traders are probably aware that market corrections are typically accompanied by a rise in metrics such as the VIX index, which gauges volatility expectations.
This is not the case in the bitcoin market, however, even though cryptocurrency prices tend to be positively correlated with technology stocks.
For example, bitcoin’s price has fallen 10% from over $70,000 over the past four weeks. Deribit’s DVOL bitcoin volatility index — an options-derived measure of expected price turbulence over the next 30 days — has fallen from 53% to 42%, hitting its lowest level since early February, according to charting platform TradingView.
Implied volatility is positively influenced by the demand for options or derivative contracts that give the buyer the right to buy or sell the underlying asset at a predetermined price at a future date. A call option gives the right to buy and a put option gives the right to sell.
The decline in DVOL amid the price correction suggests a calm market environment in which investors are less likely to panic or seek out puts or hedge bets. Additionally, bitcoin’s pullback has been slow and orderly rather than a rapid drop, which has often led investors to buy options to profit from the increased volatility.
“That’s because since BTC has come off the highs, we’ve been stuck in a sidelined market with low realized volatility,” David Brickell, head of international distribution at Toronto-based crypto exchange FRNT Financial, told CoinDesk. “There’s a lack of appetite to buy volatility in the summer months, and the structure tends to be overwriters selling vol, so in the absence of real demand, we’re pushing prices down.”
Selling Volatility This is a popular crypto strategy in which investors sell or write options in a weak market, thereby reducing implied volatility. The seller receives a premium in exchange for promising to compensate the buyer in the event of significant price fluctuations. Typically, these strategies involve writing calls in addition to spot market holdings.
According to Brickell, a further rise in BTC to levels above $70,000 would likely revive demand for options and boost the DVOL implied volatility index. The price of BTC has been Positively correlated with the DVOL index throughout this bullish cycle.
“We will likely need to see BTC retrace back to the top of the range and threaten a break higher to break out of this volatile lethargy,” Brickell said.