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Bitcoin volatility index hits lowest level since September

Created at 10 Aug · 10:21 AM1 source↑ Market-relevant
IN SHORT

Bitcoin's volatility index (BVIV) has fallen to 35.59%, its lowest point since September, indicating reduced demand for options betting on large price swings. Despite this, downside protection remains expensive, with put options trading at a premium to calls, suggesting lingering concerns about further price weakness.

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Key Numbers

35.59%Bitcoin volatility index (BVIV) level
90%BVIV peak in February
$62,000-$66,000Bitcoin price range since early July

Who's Involved

Griffin Sears
Head of derivatives at cryptocurrency prime brokerage FalconX
Himashu Sahay
Chief technology officer and co-founder of bitcoin-backed lending platform Arch
Bitcoin volatility index hits lowest level since September

↳ Why This Matters

The decline in Bitcoin's volatility suggests a temporary calm in the market, but the continued premium on downside protection indicates underlying investor caution. This dynamic could influence trading strategies and risk management for those involved in the cryptocurrency market.

Key facts

  • Bitcoin's volatility index (BVIV) dropped to 35.59% over the weekend, the lowest since September.
  • Demand for options predicting significant price movements has diminished.
  • Miners and corporate treasuries are actively selling options, increasing market supply.
  • Despite low overall volatility, put options remain more expensive than call options, indicating caution.
  • Bitcoin's price has been trading within a narrow range of $62,000 to $66,000 since early July.

Bitcoin's volatility index, known as BVIV, has fallen to 35.59%, its lowest point since September, signaling a significant decrease in demand for options that bet on large price swings. This decline is attributed to a supply-demand imbalance in the crypto options market, where a reduced appetite for directional bets coincides with an increased supply of options from miners and corporate treasuries employing overwriting strategies to generate yield.

Despite the overall drop in implied volatility, a persistent concern about further price weakness is evident. Put options, which offer protection against declines, continue to trade at a premium compared to call options. This 'put skew' suggests that while traders do not anticipate massive price swings, they remain wary of a potential deepening of the bear market.

Analysts note that the current low implied volatility might create a false sense of security for borrowers utilizing leverage. The risk of sharp price movements and potential forced liquidations remains, even if underpriced and under-hedged. Experts suggest that credit and leverage should be structured with defined risk parameters to prevent temporary liquidity squeezes from escalating into forced liquidations.

Frequently asked questions

The BVIV is a gauge of bitcoin's annualized 30-day implied volatility, similar to the Cboe Volatility Index (VIX) for U.S. equities. It reflects market expectations of future price swings.

The decrease is due to a supply-demand imbalance in the options market. Demand for bets on big price moves has dried up, while supply has increased from miners and corporations selling options.

It means investors are still paying a premium for downside protection, indicating they remain concerned about potential price declines, despite overall low volatility.

What Happens Next

01Market participants will continue to monitor BVIV for further shifts in implied volatility.
02The premium on put options will be watched for signs of changing sentiment regarding downside risk.
03The effectiveness of structured credit and leverage with defined risk parameters will be tested.

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Cadence
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How It Developed

Bitcoin's volatility index (BVIV) fell to 35.59% over the weekend.
This marks the lowest level for the fear gauge since September.
In February, BVIV had spiked above 90% as bitcoin prices fell sharply.
Demand for options predicting large price swings has decreased.
Miners and corporations are selling options through overwriting strategies, increasing supply.
Despite low overall volatility, downside insurance remains expensive, with puts trading at a premium to calls.
Bitcoin's price has remained range-bound between $62,000 and $66,000 since early July.
Low implied volatility may create a false sense of security for borrowers using leverage.

Sources

T1
Bitcoin volatility is in meltdown, but downside protection still commands a premiumCoinDesk

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