Research: Implied Volatility Shows Only Sideways Movement for Bitcoin

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The crypto derivatives market has grown so much in recent years that it can be used as an indicator of future price movements. Bitcoin Options have captured the crypto industry and have quickly become mature products whose moves have the power to influence the rest of the market.

Similar to the traditional financial market, Bitcoin options give their holders the right, but not the obligation, to buy BTC at a pre-set price on the contract expiration date. Option pricing is typically determined using a metric called implied volatility (IV), which shows the market’s opinion of the probability of price changes for a given security.

Investors often use implied volatility (IV) to estimate future volatility in a security’s price. However, while IV can predict price changes, it cannot predict the direction the price will go. A high implied volatility means that there is a high probability of a large price swing, while a low IV means that the price of the underlying asset is very likely not to change.

As such, IV is considered a good indicator of market risk.

Looking at Bitcoin’s implied volatility shows that the market sees little risk in BTC.

Bitcoin’s implied volatility is currently at a two-year low. Historically, the sharp drop in IV has followed aggressive spikes caused by black swan events: spikes were observed during the Defi summer of 2021, the Terra collapse in June 2022, and the FTX drop in November 2022.

However, the drop in implied volatility seen at the end of 2022 shows that the derivatives market does not see large price movements in the near future.

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Chart showing 25 delta skew options vs. Implied Volatility (IV) (Source: CryptoSlate)

Comparison of Bitcoin implied volatility with 25 delta skew options further confirms this.

When applied to option contracts, the bias measures the implied volatility between different strike prices with the same expiration. In a nutshell, it presents the relationship between put and call options. Delta is a measure of the change in the price of an option as a result of a change in the underlying value.

Delta 25 bias analyzes put options with a delta of -25% and calls with a delta of 25%, offset to arrive at a data point. A delta 25 put bias of -25% means that the put option costs 25% less than the spot price of the underlying asset, and vice versa.

The metric essentially measures how sensitive an option’s price is to changes in the spot price of Bitcoin. Data analyzed by CryptoSlate shows that the put options premium is down from the extreme levels seen in November and June. Spikes in the delta 25 bias are often a strong indicator for bear markets, as they correlate with extreme bouts of price volatility.

December brought a sharp drop in the delta 25 bias, which saw a slight rise in the early days of 2023. Like the drop in implied volatility, this indicates a much calmer market in the days and weeks ahead.

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