Current skew data show this Bitcoin’s (BTC) implied volatility plummeted after yesterday’s halving. In general, volatility is the focus of every professional trader, as it measures daily fluctuations in average prices and provides information about market conditions.
As Cointelegraph previously reported, Bitcoin’s halving event tends to increase volatility due to significant uncertainties. Traders expected the price to rise or fall during and after the event, hence the short-term high point. At the time of printing, the metric has returned to the previous levels.
Uncertainties can lead to volatility
In the past few months Analysts have considered the narrative that a significant decrease in the hash or hash rate could occur after halving. Supposedly, this would be due to miners shutting down their ASIC-based operations from the previous 12.5 BTC to 6.25 BTC due to the reduction in Bitcoin’s block subsidy.
Til today There is still legitimate concern about the start of a “death spiral”.This would force large miners to sell reserves and possibly even bankrupt those who have more leverage. A possible driver of this breakdown would be the fact that miners’ minimum incomes have been lowered.
Please note that transaction fees rarely exceed 5% of the miners’ income, which is mainly made up of this block grant premium. Halving the mining industry’s sales of $ 5 billion can result in wavelengths with unexpected results, including hard forks.
Traders rely on implied volatility, and the halving affected this metric
Implied volatility of BTC ATMs. Source: Skew
There are two ways to measure volatility: either based on historical data or by analyzing the current market premiums for options. It is important to note that historical data have a disadvantage when approaching price sensitive events as they favor earlier movements.
For Bitcoin, volatility had steadily declined from its peak after the Bitcoin collapse to $ 3,600 on March 12. When May came, Bitcoin’s implied volatility stabilized by 80% as the halving approached.
Option markets are a perfect way to measure possible price fluctuations because they depend on the influence of traders. The higher premiums demanded by option sellers reflect a greater fear of incoming volatility.
As shown in the following table, the “on the money” options mean that the exercises used for the calculation are included in the money, which means $ 9,000 for the current underlying Bitcoin (BTC) price of $ 8,900.
Call option prices (bullish). Source: Deribit
This is the standard for volatility measurements since there is almost no intrinsic value. A buyer of a call option (bullish) with an exercise of USD 7,000 is faced with an intrinsic value of USD 1,900 because Bitcoin is trading significantly above this level.
How traders can interpret the decline in implied volatility
Implicit volatility peaks mean an increase in option premiums. This should be interpreted as the market charging more for insurance, and it applies to both call (bullish) and put (bearish) options.
The basic strategy of buying a call option offers protection when the market rises. If you pay a premium in advance, you can purchase Bitcoin at a fixed price. The opposite is true for the buyer of the put option. who take out insurance in the event of a sudden drop in prices.
It should be noted that a change in volatility is not a bullish or bearish indicator.. Unusually high levels reflect uncertainty and should prompt traders to ensure that stop-loss orders are in place and that there is a substantial margin for leverage.
Low volatility means no less risk
Some traders tend to extrapolate that low volatility scenarios mean less risk from unexpectedly large candle holders. Please be assured that there is no such indicator. Such periods should be used to build insurance positions through option markets.
Conversely, if a trader is unprepared during a high volatility scenario, he must close all positions to avoid unnecessary execution of client orders (stop loss), or prepare for ups and downs that are almost certain to liquidate leveraged traders. .
To learn more about understanding the complexity of the cryptocurrency market, read 10 tips to keep your cryptocurrency portfolio profitable during a crisis.
The views and opinions expressed here are solely those of author and do not necessarily reflect Cointelegraph’s views. Every investment and trade movement involves risks. You have to do your own research when making a decision.