Bitcoin Price-Volatility Linkage Shifts Negative Amidst FTX Liquidation Concerns
The relationship between Bitcoin’s price and its forward-looking 30-day implied volatility has once again turned negative, signaling growing apprehension among investors regarding potential downward movements. This shift is attributed to mounting worries surrounding imminent FTX liquidations and the ongoing monetary tightening measures by the Federal Reserve, as per analysts.
The 60-day trailing correlation between Bitcoin’s price and implied volatility transitioned into negative territory approximately a week ago and had reached -0.29 by early Tuesday, according to data from Velo Data.
Over the past four weeks, Bitcoin’s price has seen a nearly 10% decline, with the price dipping below $25,000, marking a three-month low. This decline coincided with traders considering the possibility of the bankrupt crypto exchange FTX gaining approval from the bankruptcy court to initiate the sale of its crypto holdings, valued at $3.4 billion. Concurrently, the BTC DVOL index on the leading crypto options exchange, Deribit, which gauges 30-day implied volatility, surged from 32 to 42.
When price drops occur alongside an increase in implied volatility, it suggests a preference for put options, which are derivative contracts offering protection against declining prices. Implied volatility reflects investors’ expectations of price turbulence over a specific timeframe and is influenced by demand for both call and put options. Hence, the negative correlation is a result of anticipations and positioning for a potential aversion to risk stemming from the FTX situation.
Jeff Anderson, a senior trader at STS Digital, noted the market’s prior concern about the possibility of ETF approval and asymmetric upside price movements. However, this sentiment has recently shifted due to FTX liquidation news, sparking fears of a potential decline in spot prices. Consequently, implied volatility has increased as spot prices enter what is perceived as a vulnerable zone.
Griffin Ardern, a volatility trader at crypto asset management firm Blofin, also cited concerns about further monetary tightening in global markets as a driving factor behind the shift in volatility trends. He explained that the impending U.S. August Consumer Price Index (CPI) data is expected to show an uptick in inflation, prompting the Federal Reserve (Fed) to implement additional liquidity-tightening measures to combat reflation. In such liquidity redistribution scenarios, crypto assets are often deprioritized, leading to the withdrawal of liquidity from crypto and its redirection into assets like cash or U.S. stocks.
This shift in investor sentiment has led to a heightened preference for put options, resulting in the negative correlation between prices and volatility. According to Ardern, this trend is likely to persist as long as concerns about monetary tightening and inflation remain prominent.
RBC Economics anticipates the upcoming CPI report, scheduled for release on Wednesday, to reveal an increase in the U.S. cost of living to 3.6% year-over-year in August, up from 3.2% in July. Several leading indicators have signaled an impending rebound in inflation, which is expected to deter the Fed from cutting interest rates and injecting liquidity into the market in the near future.
Throughout the year, a positive correlation between market value and volatility had been the norm, with the recent flip to a negative correlation being the exception, along with a similar occurrence in May. This positive correlation had benefited BTC call option holders during price rallies, offering both directional and volatility gains. However, with the return of the negative correlation, put option holders stand to gain more during potential price declines compared to what call options would earn during price upswings, a dynamic reminiscent of equity markets.