Bitcoin Price – Volatility Correlation Turns Negative: What Does This Mean?

• The price hit a three-month low, falling from a February low of $25,000 on Monday, which covered the possibility of defunct crypto exchange FTX granting permission to start selling 3.4 billion crypto assets.
• Deribit’s BTC DVOL increased from 32 to 42 in four weeks, showing a trend toward put options, which are derivative contracts that protect against price declines.
• A decline in price and an increase in estimated volatility indicate a shift towards put options, which protect against price shifts.

Bitcoin (BTC) price and the cryptocurrency’s 30-day implied volatility indicator show reversal; Is this a good thing?

Bitcoin Price and Volatility Correlation

Bitcoin’s (BTC) price and the cryptocurrency’s forward 30-day implied volatility indicator are moving in opposite directions once again. Observers believe this negative correlation represents concerns about the impending FTX liquidations.

Bitcoin’s price has dropped nearly 10% over the past four weeks. On Monday, as the price took into account the possibility of the depleted crypto exchange FTX getting permission to start selling its $3.4 billion worth of crypto assets, it fell below $25,000, reaching its lowest level in three months. The BTC DVOL index from the leading crypto options exchange Deribit has risen from 32 to 42 over the past four weeks, indicating a trend towards put options, derivative contracts that offer protection against price declines.

The price drop and the increasing estimated volatility indicate a trend towards put options, which provide protection against price slides. Estimated volatility expresses investor expectations regarding price fluctuations during a specific period and varies depending on the demand for both call and put options. This means that the negative correlation stems from expectations of avoiding potential FTX-related risks and not from actual position-taking.

Jeff Anderson, a senior trader at STS Digital, said, “The market has been preparing for a potential ETF approval for the past few months and was, therefore, very concerned about asymmetric moves at the top.” He added, “However, recent FTX liquidation news and concerns about the downward trend in spot prices have changed this sentiment. Therefore, estimated volatility has increased alongside spot prices moving in the perceived weakness zone.”

Griffin Ardern, a volatility trader at crypto asset management company Blofin, stated that the reason behind the change in the volatility trend is concerns about additional tightening in global markets.

Ardern said, “The upcoming US August CPI data is likely to show that inflation is rising again, meaning the Fed will take further liquidity tightening measures to curb reflation. Cryptocurrencies are at the bottom of the list in terms of liquidity redistribution, meaning liquidity stored in crypto assets can be withdrawn and invested in assets such as cash or US stocks.”

Eyes on Tomorrow’s Inflation Report

According to RBC Economics, the CPI report to be released on Wednesday is expected to show that the cost of living in the US increased by 3.6% on an annual basis in August; this is higher than the 3.2% increase in July. Many leading indicators have warned of a resurgence in inflation in the coming months. This could limit the possibility of the Fed cutting interest rates and injecting liquidity into the market in the near future.

The year has been characterized by a consistent positive market value-volatility correlation, except for the recent downturn and the outlier seen in May. A positive correlation has rewarded BTC call option holders with both directional gains and volatility gains. With the return of the negative correlation, put options may provide greater gains during price declines compared to call options, which typically occur in situations like the stock market.