- Implied volatility is low, meaning traders anticipate less upward or downward price movement for Bitcoin.
- The volatility skew is higher than usual, meaning "buy" options are cheaper than "sell" options.
Arcane Research, a cryptocurrency market analysis firm, notes that options traders are “bearish, but hesitant” in a newly released report. Following Bitcoin’s slump through December and January, it claims that investors haven’t been this long-term bearish since the crash of May 2021—when the price of BTC dropped to $30,000 from its then-record high of $64,000 a month prior.
The report relies on implied volatility, which forecasts the range in which traders believe a security or cryptocurrency’s price is likely to move, to come to this conclusion.
Options allow traders to bet on the price movements of an underlying asset. They buy the option to make a transaction if the asset reaches a target price. Options for volatile assets have higher demand, since they present more potential for profit. Therefore, when assets are highly volatile, options for them are more expensive.
Implied volatility for Bitcoin is currently sitting at its lowest level since May 2021, at about 70%. That percentage refers to a statistical probability within one standard deviation that BTC's price will change by 70%; during 2021, the implied volatility reached past 110% at one point, suggesting that traders thought the price might do anything from double to be cut in half.
The Weekly Update: Week 4
🔹Confidence slowly returning to the market?
🔹#Bitcoin ETPs see slight outflows in January
🔹#Bitcoin option traders are bearish
🔹A report found Bitcoin's carbon intensity to be below the global averagehttps://t.co/zYprniSMAI
— Arcane Research (@ArcaneResearch) February 1, 2022
To get some sense of which direction they think it might be going, one can look at the volatility skew, which is at its highest level since—you guessed it—May of last year.
The volatility skew measures the relative difference in price between call and put options—options to buy or sell Bitcoin, respectively. Throughout Bitcoin’s history, call options have usually been more expensive than put options, a bullish sign as people are more interested in being able to buy BTC than worried about needing to sell off.
But volatility is now into positive territory, meaning that call options are actually slightly cheaper at the moment. That's bearish for Bitcoin. When combined with low implied volatility, says Arcane, it means traders might be hesitant to pick a direction that they think Bitcoin is headed in. Arcane concludes that now may be “an opportunity to buy some cheap calls.”
Despite attitudes among options traders, macro-market fear appears to be cooling off around Bitcoin. Promises from the Federal Reserve to tighten interest rates have been hurting crypto and stocks alike over the last two months, spurring investors to move away from risk assets. But Bitcoin's price fell less during the dip than other cryptocurrencies and has ticked up over the last week. Arcane suggests the market views Bitcoin as “the least risky cryptocurrency.”
“$40,000 is a key resistance level. With BTC’s slow grind upwards lately, we could see BTC testing this resistance level shortly,” it predicts.