Bitcoin’s Wall Street-like fear index has surged to its highest level since the collapse of the FTX exchange in 2022, indicating severe panic in the market as the price plummeted to nearly $60,000.
Volmex’s Bitcoin Volatility Index (BVIV), which represents annualized expected price volatility over four weeks, jumped to nearly 100% from 56% on Thursday.
The index is the cryptocurrency equivalent of CBOE’s VIX, a so-called fear/panic gauge that indicates 30-day implied volatility for the S&P 500 and rises during market panics as traders bid up options prices to hedge against index declines.
The same thing often happens with BVIV, rising during market panics as observed on Thursday.
Cole Kennelly, founder and CEO of Volmex Labs, told CoinDesk in a Telegram chat: “A wave of panic has swept through the cryptocurrency market this week, which has been associated with sharp risk-off moves across various asset classes. Bitcoin’s 30-day implied volatility, as measured by the BVIV index, surged from just over 40 to 95 in a matter of days, a level not seen since FTX’s infamous collapse in late 2022.”
Implied volatility is affected by demand for options or derivatives contracts that help traders earn asymmetric returns from an uptrend in the underlying asset and hedge against downside risk. Call options are used to bet on an upward trend, while put options are often used as insurance against a price decline.
As Bitcoin prices fell from $70,000 to nearly $60,000 on Thursday, traders rushed to buy Deribit-listed options, especially puts. According to data source Deribit Metrics, the five most traded options in the past 24 hours all have put options with strike prices between $70,000 and $20,000. The $20,000 put option represents a bet that the price will fall below that level.
“Volatility markets reacted sharply to last night’s price declines. Front-end volatility spikes as traders adjust gamma [near-term risks]. Short-term volatility leads the way higher, signaling a higher need for protection, while longer-term volatility lags, resulting in a sharp inversion of the volatility curve. ” Jimmy Yang, co-founder of institutional liquidity provider Orbit Markets, told CoinDesk.
Yang’s clients rushed to buy downside protection, fearing a price collapse that could destroy digital asset Treasuries buying Bitcoin at higher levels. These companies may now be liquidated at a loss, causing the price of Bitcoin to fall further.
He added: “With there still being significant uncertainty going forward, particularly around DAT and the risk of further unwinding, we are seeing a lot of client demand for downside protection.”
As of this writing, Bitcoin’s price has rebounded to over $64,000, up more than 5% from overnight lows, according to CoinDesk. Yang expects volatility to stabilize.
“Market sentiment is one of extreme fear, but Bitcoin’s price appears to have found a base around $60,000. If price action stabilizes, volatility looks high and could fall back quickly,” he said.
