Implied Volatility Shows Only Sideways Movements for Bitcoin

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The crypto derivatives market has grown so large over the past few years that it can be used as an indicator of future price movements. Bitcoin options captured the crypto industry and quickly evolved into mature products whose movements have the power to influence the rest of the market.

Just like in the traditional financial market, bitcoin options grant their holders the right, but not the obligation, to buy BTC at a predefined price on the expiration date of the contract. Options are typically priced using a measure called implied volatility (IV), which shows the market’s view of the likelihood of changes in the price of a given security.

Implied volatility (IV) is often used by investors to estimate the future price volatility of a security. However, while IV can predict price fluctuations, it cannot predict the direction the price will go. High implied volatility means there is a high probability of a large price move, while a low VI means the price of the underlying asset is unlikely to change.

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

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

Bitcoin’s implied volatility is currently at a two-year low. The steep drop in IV has historically followed aggressive spikes caused by black swan event spikes seen during Defi Summer 2021, Terra Collapse in June 2022, and FTX Collapse in November 2022.

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

Chart showing delta skew of 25 options versus implied volatility (IV) (Source: CryptoSlate)

Comparing Bitcoin’s 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 simple terms, it presents the relationship between put and call options. Delta is a measure of the change in the price of an option resulting from a change in the underlying security.

The delta 25 bias examines puts with a -25% delta and calls with a 25% delta, compensated to arrive at a data point. A put bias of 25 deltas of -25% means that the put option costs 25% less than the spot price of the underlying asset, and vice versa.

The metric basically measures an option’s price sensitivity to changes in the spot price of Bitcoin. Data analyzed by CryptoSlate shows that the premium for put options has declined from the extreme levels seen in November and June. Spikes in the delta 25 bias are generally a good indicator of bear markets, as they correlate with extreme episodes of price volatility.

December brought a sharp decline in the 25-delta skew, which saw a slight increase in the early days of 2023. Along with the decline in implied volatility, this points to a much calmer market in the days and weeks ahead.

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