Sideways signal? Bitcoin Volatility Nears All-Time Lows

Bitcoin is known to be a highly volatile asset. However, the current Bitcoin market volatility is being extremely compressed. Is this because Bitcoin has lost its high volatility, or is the market mispriced?

Summary

• As we all know, the fluctuation of Bitcoin price has always been very violent, but the fluctuation range of Bitcoin in the current market is being extremely compressed, and the trading days with a range smaller than the current price range only account for less than 5% in history.

• The performance of the futures market was mediocre, the trading volume of BTC and ETH both hit record lows, and the futures and spot arbitrage yield was 5.3%, slightly higher than the risk-free rate.

• Implied volatility in the current options market has fallen sharply, reaching record lows, and even less than half of the 2021-2022 baseline.

• Both the put/call ratio and the 25% Delta skew indicator are at historic lows, suggesting that the options market is seeing a surge in call demand, while puts are priced to indicate very little future volatility.

Sideways signal

The current BTC spot price is above several industry-widely used long-term moving averages (111D, 200D, 365D, and 200W). These averages range from a low of $23,300 (200DMA) to a high of $28,500 (111DMA). The chart below also shows similar periods in the past two cycles that have tended to correspond to macro uptrends.

Figure 1: Long-term moving average price model

The same is true for the realized price model, which we can model with three different base costs for groups:

• Yellow: overall market (realized prices).
• Red: short-term holders (holding Token for no more than 155 days).
• Blue: Long-term holders (holding Token for more than 155 days).

Spot prices are also higher than realized prices for all three groups, consistent with above long-term moving average prices.

Figure 2: On-chain base cost for long/short term holders

About 842 days have passed since reaching the peak of the bull market in April 2021. The market recovery in 2023 is better than the previous two cycles, only 54% below the peak of the bull market, compared with the historical average of 64%.

We also note that both the 2015-2016 and 2019-2020 cycles saw a 6-month period of consolidation before the market accelerated above the 54% retracement level, perhaps signaling possible periods of sideways going forward .

Figure 3: Price Performance Since Bull Market Peak

Both quarterly and monthly price performance of Bitcoin has cooled after the market heat at the start of the year dissipated. This phase also has many similarities to previous cycles. In previous cycles, initial bottom rallies have been very strong, followed by prolonged periods of consolidation.

This period is often referred to by analysts as the reaccumulation period.

Figure 4: Quarterly and monthly price performance

Bitcoin volatility narrowed significantly

Realized volatility for Bitcoin's 1-month, 3-month, 6-month, and 1-year windows has fallen sharply in 2023, reaching multi-year lows, with the 1-year window being the most volatile. This is also the lowest level of volatility in the 1-year window since December 2016. This is the fourth such period of extreme volatility compression:

• At the end of 2015 and the beginning of 2016, the market was in the stage of re-accumulation;
• In late 2018, the market entered a full bear market after a sharp sell-off in November. This was followed by a recovery rally in April 2019, which took Bitcoin from $4,000 to $14,000 in three months;
• After March 2020, the market entered a period of consolidation;
• At the end of 2022, the market gradually digested the collapse of FTX.

Figure 5: Annual Realized Volatility

Last week, the difference between the high and low of the 7-day price range was only 3.6%, and historically, only 4.8% of sessions were below that value.

Figure 6: 7-day price highs and lows

The 30-day price ranges are similarly narrow, with only a 9.8% difference between Bitcoin’s price highs and lows last month, and only 2.8% of monthly price ranges historically have been wider than 9.8%. This level of sideways trading and low volatility is extremely rare for Bitcoin.

Figure 7: 30-day price highs and lows

The derivatives market is also calm

This state of silence is also evident in the derivatives markets for BTC and ETH. Total futures and options volumes for the two assets, ethereum and bitcoin, respectively, are at or near all-time lows.

The current total derivatives transactions in the BTC market are 19 billion US dollars per day, while the total derivatives transactions in the ETH market are only 9.2 billion US dollars per day, setting a new low since January 2023.

Figure 8: BTC vs ETH derivatives trading volume

Recently, investors have also maintained a relatively risk-averse attitude. In the futures market, the proportion of Bitcoin has slowly increased.

During 2021-2022, relative to Bitcoin, the trading volume and open interest of the Ethereum futures market will increase steadily, and will reach a peak of 60 BTC : 40 ETH in the second half of 2022.

In 2023, the situation has changed, and Bitcoin has gradually gained the upper hand. Reduced market liquidity and reduced risk appetite have pushed the risk curve upward.

Figure 9: BTC vs ETH Perpetual Futures Contract Open Interest Percentage

Bitcoin and Ethereum open interest in the futures market was relatively flat at $12.1 billion last month. It is similar to the situation in the second half of 2022, when the price of Bitcoin is about 30% lower than it is now, and there is no thunderstorm on FTX. It is also similar to the January 2021 rally period, when the price of Bitcoin rose by 30%, and the market was not yet mature.

Figure 10: Futures Open Interest (Pledged)

In contrast, the dominance of the options market has risen significantly, with open interest more than doubling in the past 12 months. The options market is currently comparable to the futures market in terms of open interest size.

On the other hand, futures open interest has been steadily declining since the end of 2022 (the FTX storm), with only a slight increase in 2023.

Figure 11: Open interest in futures and options markets

The bullish trend in the futures market is strong

With little trading volume and relatively low market activity in the futures market, investors' eyes are on identifying opportunities that could revitalize the digital asset derivatives space.

In the futures market, the term structure (the yield curve of zero-coupon bonds) indicates that an annualized rate of return of 5.8% to 6.6% can be obtained through spot arbitrage (using the price difference between the futures market and the spot market, buying low and selling high to obtain income) . Still, that's only a slight increase over the yields on short-dated U.S. Treasuries or money market funds.

Figure 12: Futures Term Structure

The perpetual swap market is the most liquid crypto asset derivatives trading market, where traders and market makers can lock in financing rates to arbitrage futures and spot prices. This kind of futures and cash arbitrage is more volatile, and the current annualized rate of return is 8.13%, which is extremely attractive to investors.

In addition, since January, financing rates have continued to rise, and it can be seen that market sentiment has changed significantly since the end of 2022.

Figure 13: Perpetual fund annual interest rate vs 3-month rolling interest rate

Continuing to look at the options market, the current market volatility has been compressed to an extremely low level, and the implied volatility of all contract expiration dates has fallen to historical lows.

The volatility of the Bitcoin market is very large, and the implied volatility of option trading in 2021-2022 basically fluctuates between 60% and 100%. Currently, however, volatility premiums in the options market are at historic lows, with implied volatility ranging from 24% to 52%, less than half the long-term baseline.

Figure 14: Current Options Implied Volatility

Looking at the term structure of implied volatilities below, we can see that the volatility premium has shrunk rapidly over the past two weeks, with implied volatility for options contracts expiring in December 2023 falling from 46% to 39%. Volatility premiums for options contracts expiring in June 2024 are at just over 50%, historically low.

Figure 15: Option Implied Volatility Term Structure

The put/call option turnover and open interest ratios are both at or near record lows at 0.42 and 0.48, respectively. This suggests that the market is still largely bullish, with demand for call options still dominating.

Figure 16: Put/Call Option Ratio

Thus, puts are getting cheaper relative to calls, and the 25% Delta Skew (25% Delta Skew is calculated as the difference between the implied volatility of the 25% Delta Put and the implied volatility of the 25% Delta Call ) indicator hit a record low. In general, this shows that the options market and the futures market are currently comparable in size, and the implied volatility of the options market is at historically low levels.

However, since less than 5% of the trading days in history are less than the current price range of Bitcoin, does this mean that Bitcoin has got rid of the previous inherent impression of its high volatility? Or is it the result of Bitcoin being mispriced?

Figure 17: Options 25% Delta Skew Indicator

Summarize

We seldom hear people say that Bitcoin is an asset with a stable price. Everyone thinks that Bitcoin is a highly volatile asset. Therefore, the current monthly price fluctuation of Bitcoin does not exceed 10%. People are surprised. Arguably, this is the lowest volatility Bitcoin has ever seen for some time.

The futures arbitrage yield ranges from 5.3% to 8.1%, which is slightly higher than the risk-free interest rate of short-term U.S. Treasury bonds. The implied volatility premium in the options market is at an all-time low, and demand for put options is the thinnest.