Despite the recent pullback cryptocurrency Markets off multi-month highs earlier this month, options markets suggest traders still have relatively low volatility expectations. Both Deribit’s Bitcoin and Ethereum volatility indices remain near record lows, according to data provided by The Block from a year ago.
The Recent Pullback in Crypto Prices That Has Been Seen Bitcoin The fall back from the previous annual high above $24,000 to the mid-$21,000s and the fall from the previous annual high above $1,700 to below $1,500 has been caused by a combination of 1) in the wake of the recent more restrictive US interest rate outlook concern in Hawkish Fed Communications and concerns about stronger than expected US data and 2) US regulatory action on the big US-based crypto firm,
of Deribit Bitcoin The volatility index stood at 48 on Monday, not much higher than last month’s record low of 42 and well below the high of 73 in mid-January. 58 and down sharply from above 80 in mid January recently. Deribit is the leading cryptocurrency derivatives exchange, accounting for approximately 95% of open interest in all bitcoin and ethereum derivatives markets.
Short-term volatility expectations also turned subdued
Despite declines in US consumer price index and retail sales data this week, which together could inform expectations of a Fed tightening outlook and a possible US recession later this year, at-the-money (ATM) Bitcoin’s 7-day implied volatility fell to 39.68% on Monday, its lowest in more than a month, according to the options market.
This is despite warnings from macro strategists that this week’s upcoming data could really shake things up for crypto, with a reverse inflation surprise touted as a potential catalyst to send bitcoin back towards $20,000.
Investors Underestimating Price Volatility Risk?
With Deribit’s Bitcoin and Ethereum volatility indices and Bitcoin’s 7-day ATM implied volatility all being at subdued levels, the interpretation is that investors are not positioning for larger moves in the short or medium term. But this lax attitude towards crypto price volatility risks may be misplaced, with many strategists warning that the volatile bear market conditions of 2022 could return.
Indeed, Mike McGlone, senior macro strategist at Bloomberg, issued a reminder to crypto traders on Monday – “Don’t fight the Fed”. Monetary tightening from the US Federal Reserve was “the major headwind for (crypto) markets in 2022 and remains so in Q1 (2023),” McGlone continued. The Fed aggressively raised interest rates from near zero to above 4.0% in 2022 and intends to raise them above 5.0% in the first half of 2023, according to the latest comments from the Bank’s policymakers.
Commenting on the bitcoin market, “the more tactically oriented is likely to focus on responsive sales, and it may be a while before the buy-and-hold type gains the upper hand”. McGlone’s comments chime with a popular sentiment held by many analysts at the moment – crypto (and US stocks) markets appear to be ignoring macro risks. Many analysts go a step further than McGlone and outright predict that the crypto rally that started earlier this month is about to go further.
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