Traders Improve Their Hedge Against Price Risk As Bitcoin Implied Volatility Is Dropping
- The volatility of the market dropped below 60% for the first time since May.
- The average price change was about 8% daily for Bitcoin in December last year.
Bitcoin has spent about ten years around the public, and the price has gone through a lot of change in that time. The Skew blockchain research boutique in London recently posted to Twitter about their Bitcoin research, shedding light on the token’s volatility.
While the market has been historically volatile, the changes of the term structure through this final quarter of the year shows that the market may finally reaching a potential level of sophistication, at least with hedging price risks.
Bitcoin implied vol since the rally started in April
The most visible trend in Q4 is the steepening of the term structure
Market getting more sophisticated at pricing risk? pic.twitter.com/ogfNCKqd8m
— skew (@skewdotcom) December 2, 2019
Ever since the price of Bitcoin reached $13,700 in July – the peak of 2019 so far – the volatility of the asset has been decreasing. This implied volatility is a necessary metric for options contracts pricing.
Presently, Bitcoin is still driven by the traders that go for massive gains when they bet on the asset, but the increased stability of Bitcoin is reducing the volatility that makes it a challenging asset. The realized volatility peaked at the end of December last year, which happened at the same time as a massive price rally, though the average price change was about 8% a day.
The at-the-money implied volatility (ATM IV) dipped below 60%, which hasn’t happened since May. With that, Bitcoin made a sudden upside move, which happened the same day.
In a research paper published by Skew last year, the writers stated that the market for BTC options will need to become more established before the curve stops steepening. The main source of buying flows will continue to be the crypto miners in the market, which is relatively normal for major commodities.
Bakkt’s Bitcoin options are planned for launch on December 9th, though CME Group also plans to launch their Bitcoin options. The launch of Bitcoin options by CME Group won’t happen until the first quarter of 2020. While options and futures with Bitcoin can come with a massive risk, traders continue to turn to these derivatives for their potential for higher gains.