The Curious Case of Bitcoin Volatility During Market Corrections

Experienced stock traders are well-versed in the fact that market corrections often coincide with an increase in metrics such as the VIX index, reflecting heightened volatility expectations. Interestingly, this trend does not necessarily apply to the bitcoin market, despite the usual positive correlation between cryptocurrency prices and technology stocks.

For instance, as bitcoin’s price has retraced by 10% from its peak above $70,000 over the last four weeks, the Deribit’s bitcoin volatility index DVOL has shown a different pattern. DVOL, an options-derived measure forecasting price turbulence in the next 30 days, has actually decreased from an annualized 53% to 42%, hitting its lowest point since early February according to data on TradingView.

Implied volatility is influenced by the demand for options or derivative contracts that provide the right to buy or sell the underlying asset at a predetermined price in the future. When investors anticipate significant price movements, they tend to purchase options to hedge against risks. However, the decline in DVOL amidst the recent price correction suggests a market environment characterized by reduced panic and lower interest in protective strategies like hedging.

The gradual and orderly nature of bitcoin’s decline has deterred investors from engaging in panic selling or rushing to hedge their positions. This steady pullback often prompts investors to seek profits from increased volatility through buying options.

David Brickell, head of international distribution at Toronto-based crypto platform FRNT Financial, shared insights on the situation, stating that the current market lacks a strong appetite for volatility heading into the summer months. He noted that prevailing market trends lean towards volatility selling, a strategy where investors sell options to decrease implied volatility, especially in quieter markets.

According to Brickell, a potential resurgence in bitcoin’s price above $70,000 could reignite interest in options and drive up the DVOL implied volatility index. Throughout the current bull cycle, there has been a notable positive correlation between BTC’s price movements and the DVOL index.

“For us to break out of this low volatility phase, we will likely need to see bitcoin testing higher levels and possibly threatening a breakout towards the upper range,” Brickell commented, highlighting the potential catalysts that could revive volatility in the bitcoin market.