The subdued volatility expectations suggest that traders are relaxed about Bitcoin and the price risks
Although cryptocurrency markets have pulled back from their multi-month highs earlier this month, options markets indicate that traders still expect relatively low volatility. According to data from The Block, Deribit’s Bitcoin Volatility Indices and Ethereum Volatility Indices remain at record lows. The Block also provides data going back one-year.
The recent dip in crypto prices, which has seen Bitcoin drop back to the mid-$21,000s after earlier annual highs of $24,000 and Ethereum sink below $1,500 since earlier annual highs of $1,700, was caused by a combination 1) concerns about US interest rates being more restrictive in the wake of recent events Fed Communications: Hawkish Stronger than expected US data, and 2) concern about a US regulatory crackdown against large crypto-firms based in the US.
Deribit’s Bitcoin Volatility Index stood at 48 Monday. This was not far from its record lows at 42 last month and well below the mid-January highs at 73. Deribit’s Ethereum Volatility Index was at 62 on Monday, just above its January record lows of 58, and sharply below recent mid-January highs of 80. Deribit controls approximately 95% of all open interest in cryptocurrency derivatives markets.
Short-term Expectations for Volatility Also Subdued
Despite the looming US Consumer Price Index (US Retail Sales) data this week, which could simultaneously inform expectations about the Fed’s tightening outlook, Bitcoin’s 7 day Implied Volatility according To At-The-Money options markets fell to 396.8% on Monday. This is its lowest level in over a month.
Despite warnings from macro strategists, crypto could be shaken up by this week’s data. An upside inflation surprise is being touted as a catalyst for Bitcoin to return towards $20,000.
Are Investors Underestimating the Risks of Price Volatility?
The Deribit’s Bitcoin Volatility and Ethereum Volatility indexes, and Bitcoin’s 7 day ATM Implied Volatility are all at subdued levels. This suggests that investors are not positioning for large moves in the near or mid-term. However, many strategists warn that crypto price volatility risks could be misplaced. They believe the bear market conditions may return in 2022.
Mike McGlone, Bloomberg’s senior macro strategist, reminded crypto traders Monday to “Don’t fight the Fed.” McGlone said that the US Federal Reserve’s tightening of the monetary system was “the dominant headwind for (crypto]markets in 2022” and will continue to be so in Q1 (2023). According to the most recent commentary by the bank’s policymakers, the Fed increased interest rates aggressively from near zero to above 4.0% 2022. It now intends to lift them above 5.0% during the first half 2023.
McGlone commented on the Bitcoin market that “the more tactically-oriented are likely to focus upon responsive selling, and may be a while until the buy-and hold types gain the upper hand.” McGlone’s comments echo a sentiment shared by many analysts right now – Crypto (and US stock markets) seem to ignore macro risks. McGlone’s comments are not the only one that analysts have taken to heart. Many others predict that the crypto pullback which began earlier in this month will continue.