Markets
Bitcoin’s $70K pullback characterized by ‘volatile lethargy’
Experienced stock traders are probably aware that market corrections are often accompanied by a rise in metrics such as the VIX index, which measures volatility expectations.
However, this is not the case in the bitcoin market, although cryptocurrency prices tend to be positively correlated with technology stocks.
For example, as bitcoin’s price has retreated 10% from above $70,000 in 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% annualized to 42%, hitting its lowest level since early February, according to charting platform TradingView.
Implied volatility is positively impacted 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 later date. A call option gives the right to buy and a put option gives the right to sell.
The drop in DVOL amid the price correction suggests a calm market environment in which investors are less inclined to panic or seek protective puts or hedge bets. Furthermore, bitcoin’s pullback has been slow and orderly rather than a rapid decline, often prompting investors to buy options to profit from the volatility boom.
“It’s because ever since BTC faded from the highs, we’ve been stuck in a range-bound market with low realized volatility,” David Brickell, head of international distribution at Toronto-based crypto platform 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’ve fallen further.”
Volatility selling is a popular crypto strategy where investors sell or write options in a weak market, reducing implied volatility. The seller receives a premium for promising to compensate the buyer in case of sharp price swings. Typically, such strategies involve writing calls on spot market holdings.
According to Brickell, a further rally in BTC to levels above $70,000 will likely revive demand for options and boost the DVOL implied volatility index. BTC price has been Positively correlated with the DVOL index throughout this bullish cycle.
“We will likely need to see BTC retest towards the top of the range and threaten a rally to break out of this volatility lethargy,” Brickell said.