Opinion: Bitcoin Traders Are Worrying About 'Tail Risk'

Author: Omkar Godbole, CoinDesk; Compiler: Songxue, Jinse Finance

• The relative abundance of out-of-the-money calls and puts tied to bitcoin suggests traders are pricing in "tail risk" in the bitcoin market. *Tail risk indicates a higher probability that an investment deviates from the mean by more than three standard deviations.

They call it the tail risk of **cryptocurrency markets: the risk that an asset’s current price will deviate by three standard deviations against the backdrop of rare events. **

Traders are worried about such an event for Bitcoin (BTC), which has hovered around $26,000 since falling more than 10% in the week to Aug. 20. **Bitcoin’s seven-day historical or realized annualized volatility has fallen to 26% from nearly 60% earlier this week, according to Amberdata. **

Griffin Ardern, a volatility trader at crypto asset manager Blofin, said: ** "Bitcoin's Butterfly index has risen to a yearly high. This shows that investors and market makers are pricing in tail risk."**

**The Butterfly Index measures the relative abundance of out-of-the-money (OTM) calls and puts by comparing cryptocurrency exchange Deribit's Bitcoin Volatility Index (DVOL) to spot-to-money (ATM) volatility. **

A rise in the index indicates relatively strong demand for OTM options or calls with strike prices above the current BTC price, and puts with strike prices below the prevailing market price of BTC. In other words, **it indicates a trader's fear of tail risk or sensitivity to uncertainty. **

** A call option is a derivatives contract that gives the buyer the right to buy the underlying asset at a predetermined price at a later date. ** ** A put option confers the right to sell. ** Call option buyers are implicitly bullish on the market, while put option buyers are bearish on the market. Demand for out-of-the-money calls and puts increases when traders anticipate above-average price action.

“Looking at the BTC Butterfly Index, we can see that the wing shape is approaching the 90% percentile (red horizontal line). So while the direct volatility [indicator] seems confident that the spot price is consolidating, traders are still paying for the tail price,” Greg Magadini, director of derivatives at Amberdata, said in a weekly newsletter.

The butterfly index remains elevated, indicating lingering fears of an outsized move in bitcoin's price. (Amberdata):format(jpg)/cloudfront-us-east-1.images.arcpublishing.com/coindesk/YWXRPZ5ELBB7TBUGGUI5XKIGXE.png)

The Butterfly Index remains elevated, indicating lingering concerns about large price swings in Bitcoin. (Amberdata)

The index is expressed as the ratio or spread between cryptocurrency exchange Deribit's Bitcoin Volatility Index (DVOL) and At-the-money Volatility (ATM). Deribit's DVOL considers the pricing of all options, while the ATM tool is based on the pricing of at-the-money options.

**Pricing of tail risk is consistent with lingering macroeconomic uncertainty. **

On Friday, Federal Reserve Chairman Jerome Powell reiterated that the central bank remains committed to achieving and maintaining its 2% inflation target, while signaling that monetary policy will remain tight for longer than expected.

**The Fed's continued tightening bias has lifted bond yields to their highest level since 2007. Rising bond yields tend to weigh on risk assets, including cryptocurrencies. **

"One of Jerome Powell's key insights was that 'getting inflation back to 2% may require below-trend growth,' which means he's not worried about some hits to the economy and the job market," Magadini noted. .”

Ardern said tail risks were likely to remain high ahead of Friday's U.S. non-farm payrolls report. ** Data likely showed the U.S. economy added 200,000 jobs last month after adding 209,000 jobs in June, leading to steady unemployment at 3.6%, The Wall Street Journal reported.