Awaiting sharp change in Bitcoin price as BTC volatility has fallen to a 16-month low

The aggregate open interest of Bitcoin options (BTC) has risen to $ 2 billion, 13% below the all-time high. Although open interest remains heavily concentrated in the Deribit exchange, the Chicago Mercantile Exchange (CME) has also reached $ 300 million.

In simple terms, lOption derivative contracts allow investors to buy protection, either up (call options) or down (put options). Although there are some more complex strategies, the mere existence of liquid option markets is a positive indicator.

According Coinmarketcap, currently the market capitalization of Bitcoin is USD $ 210,097,879,074.

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

Implied volatility is a useful and primary measure that can be drawn from option prices.. Whenever traders perceive a higher risk of major price swings, the indicator will move up. The opposite occurs during periods when the price remains the same or if price swings are expected to be milder.

The 3-month option contracts implied volatility. Source: Skew

Volatility is commonly known as an indicator of fear, but mostly it is a retrospective metric. The 2019 high seen in the chart above coincided with the June 26 high of $ 13,880, followed by a sudden decline of $ 1,400. The most recent volatility spike, in March 2020, occurred after a 50% decline in just 8 hours.

Indicators signal an abrupt price change in process

Low volatility periods are catalysts for more substantial price movementsas they point out that market makers and arbitration desks are willing to sell protection with lower premiums.

This is because Increased open interest on derivatives leads to longer settlements when there is a sudden price change.

Investors should then turn their attention to the futures markets to assess whether a potential storm is brewing.. The increase in open interest denotes either a greater number of market participants or that larger positions are being created.

Bitcoin futures contracts add open interest. Source: Skew

The current ones $ 4.2 billion of aggregate open interest They might be modest compared to the August peak of $ 5.7 billion, but they are still relevant.

One by reasons could be holding back a higher number, including the current CFTC charges against BitMEX and the $ 150 million hack to KuCoin.

High volatility is another critical factor holding back open interest in Bitcoin derivatives.

Although 57% is the lowest figure in the last 16 months, it is still a considerable premium, especially for long-term options. Both options and futures have a lot of synergy, as the most advanced strategies combine both markets.

A buyer who bets on a goal of $ 14,000 by March 21 in 160 days must pay a premium of 10%. Therefore, the price at expiration should reach $ 15,165 or 34% above the current $ 11,300.

Apple’s 90-Day Implied Volatility (AAPL). Source: Alphaquerry.com

As a comparison, Apple stock (AAPL) has a 3-month volatility of 41%. Although higher than 29% of the S&P 500, the long-term shock versus 47% for Bitcoin has surprising effects. The same 34% rise for a call option in March 2021 for AAPL shares carries a premium of 2.7%.

To put things in perspective If an APPL share were priced at $ 11,300, this March 2021 option would cost $ 308. Meanwhile, BTC is trading at $ 1,150, which is almost four times as expensive..

Betting on the 20 thousand dollars? Options might not be the best way

Although carrying a perpetual futures position for longer periods has an implicit cost, it has not been a burden. This is because the perpetual futures funding fee is typically charged every 8 hours.

Perpetual futures financing rate. Source: Digital Assets Data

The funding rate has been oscillating between positive and negative for the last two months. This results in a net neutral impact on buyers (longs) and short sellers who may have been carrying open positions.

Due to their inherent high volatility, Bitcoin options may not be the optimal way to structure leveraged bets. The same $ 1,150 cost of the March 2021 option could be used to acquire Bitcoin futures using leverage of 4. This would yield a profit of $ 1,570 (136%) once Bitcoin reaches the same 34% increase needed to the breakeven point of the option.

The above example does not invalidate the use of options, especially when building strategies that include the sale of call or put options. Keep in mind that the options have a set expiration date. Therefore, if the desired price range occurs only the next day, it does not generate any profit.

For the bulls out there, Unless there is a price range and specific time frame in mind, it seems that for now the best solution is to stick with perpetual futures..

The views and opinions expressed here are solely those of the autor and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk, you must carry out your own research when making a decision.

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