Bitcoin price sharply as BTC volatility drops to 16-month low

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Overall open interest in Bitcoin options (BTC) fell to $ 2 billion, 13% below the all-time high. While open interest is still heavily focused on the Deribit exchange, the Chicago Mercantile Exchange (CME) also hit $ 300 million.

Simply put, option derivative contracts allow investors to buy protection, either on the upside (call options) or on the downside (put options). Even though there are more complex strategies, the mere existence of liquid options markets is a positive indicator.

For example, derivative contracts allow miners to stabilize their income which is tied to the price of a cryptocurrency. Arbitrage and market making firms also use the instruments to hedge their trades. Ultimately, highly liquid markets attract larger participants and increase their efficiency.

Implied volatility is a useful and primary metric that can be taken from option pricing. Whenever traders perceive an increased risk of larger price swings, the indicator will move higher. The reverse occurs during times when the price is flat or if smoother price movements are expected.

The 3 month option contracts involved volatility. Source: Skew

Volatility is commonly referred to as an indicator of fear, but it is primarily a retrospective measure. The 2019 peak seen on the chart above coincided with the high of $ 13,880 on June 26, followed by a sudden drop of $ 1,400. The most recent peak in volatility in March 2020 came after a 50% drop in just 8 hours.

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