In the ever-volatile world of cryptocurrencies, the correlation between the price of Bitcoin (BTC) and its implied volatility has taken a sharp negative turn once more, raising alarms among crypto traders and investors. This dramatic shift comes against a backdrop of looming FTX liquidations and continued monetary tightening by the Federal Reserve, suggesting a turbulent road ahead for digital assets.
Bitcoin and Implied Volatility
As the crypto community watches closely, the correlation between Bitcoin’s price and its 30-day implied volatility has plunged into negative territory, indicating growing apprehensions about potential downward price movements.
Coindesk, citing data from Velo Data, said this negative correlation reached -0.29, a significant shift from the recent positive correlation trend.
FTX Liquidations Loom Large
One major factor contributing to this market uncertainty is the imminent $3 billion FTX liquidation. With Bitcoin’s price already down by nearly 10% over the past four weeks and dipping under the $25,000 mark last Monday, the market braces for the possibility that FTX may gain the bankruptcy court’s approval to sell its massive crypto holdings. The impending event has sparked concerns and prompted investors to position themselves defensively.
Implied Volatility and Derivative Contracts
The simultaneous decline in Bitcoin’s price and the increase in implied volatility suggests a rising preference for put options, which provide protection against price declines. Implied volatility reflects investor expectations of price turbulence over a specific period, and its fluctuations are influenced by demand for both call and put options.
This negative correlation indicates that market participants are preparing for potential risk aversion triggered by the FTX liquidation.
Market Sentiment Shift
Market sentiment has undergone a noticeable transformation in recent weeks. Initially, investors were focused on the possibility of ETF approval, driving concerns about upward price movements. However, the FTX liquidation news has shifted sentiment, with fears emerging that the crypto market’s bottom may drop out. Consequently, implied volatility has surged as traders seek to navigate this perceived weakness.
Global Monetary Tightening
Another factor contributing to the shift in volatility trends is concerns about global monetary tightening. As the U.S. August Consumer Price Index (CPI) data is expected to reveal a rebound in inflation, the Federal Reserve may consider implementing further liquidity-tightening measures to counteract reflation based on the analysis of RBC Economics.
In this scenario, liquidity allocated to crypto assets could be withdrawn and redirected into traditional assets like cash or U.S. stocks, intensifying the preference for put options and reinforcing the negative correlation between prices and volatility.
In a year marked by predominantly positive market value-volatility correlation, the recent negative flip raises questions and concerns within the cryptocurrency space. While positive correlations rewarded BTC call option holders during price rallies, this shift to negative correlation suggests that put holders could potentially profit more during price declines.
As crypto enthusiasts await further developments, the crypto market’s dynamics remain uncertain, influenced by a multitude of factors, including FTX liquidations and the Federal Reserve’s monetary policies.
Giancarlo is an economist by profession with a career spanning nearly two decades. His professional journey has seen him assume vital roles in various government and private organizations such as the Department of the Interior and Local Government (DILG), the National Economic and Development Authority (NEDA), Megaworld Corporation, and the China Banking Corporation in the Republic of the Philippines.
In addition to his civic and corporate pursuits, his forward-thinking approach has led him to manage several prominent websites in the banking and finance sector, notably the Australia-based RateChoice, where he immersed himself in the world of emerging financial technologies and where he found particular interest in Bitcoin all the way back to 2013.
Prior to his addition to Blockzeit’s dynamic team, he held an essential role as Project Manager for initiatives encompassing blockchain, stablecoin, mining, special economic zone development, and iGaming. This noteworthy chapter in his career unfolded under the auspices of InPlan Consultancy Services, Inc., the think-tank of IMPERO Consortium Management Corporation headquartered in Manila, Philippines, and Tokyo, Japan. InPlan, led by a distinguished retired Cabinet member of the Philippines, collaborates directly with IMPERO’s core management team, contributing to strategic planning and business development endeavors.