Bitcoin’s Implied Volatility Suggests Recovery Set to Continue

Bitcoin’s swift recovery from one-month lows has some investors saying the rebound is likely to continue. The activity in the options market suggests they may be right.

Data provided by derivatives research firm Skew show bitcoin’s one-week implied volatility jumped to an annualized 75% on Thursday, topping the one-, three- and six-month gauges, as Russia’s invasion of Ukraine saw investors dump risky assets in favor of gold and fiat currency havens.

“Bitcoin’s short-term implied volatility exceeding long-term implied volatility indicates a likelihood of market reversal,” Robbie Liu, a researcher at crypto financial services provider Babel Finance, told CoinDesk in an email. “A similar trend was observed after the May 2021 crash.”

Implied volatility refers to investors’ expectations for price turbulence over a specific period. While the metric is forward-looking, it doesn’t say anything about the direction of the impending price volatility.

The metric is mainly determined by the demand for options, which are hedging tools. As such, a pop in implied volatility is taken to represent uncertainty and an inverted structure, in which short-term implied volatility is greater than the longer-term gauges, signals panic.

Historically, the inverted structure has marked a price bottom.

The one-week implied volatility last topped the longer-term gauges on Jan. 24 when bitcoin fell to a six-month low under $33,000. The cryptocurrency picked up a bid on the following day and hit highs above $45,000 early this month. Bitcoin’s early December sell-off ran out of steam with the one-week gauge rising well above the six-month metric.

Bitcoin’s late September 2021 bottom and May-June 2021 bottom coincided with short-term volatility expectations signaling panic.

If history is a guide, bitcoin may build on Thursday’s rebound from lows under $34,500. That said, the cryptocurrency remains vulnerable to renewed risk aversion in stocks. “This is only a short-term resurge and does not mean that BTC won’t drop below $34,000 in the mid-term,” Liu said.

At press time, bitcoin was trading near $38,600, representing a 0.6% gain on the day. Futures tied to the S&P 500 traded 0.5% lower, according to investing.com.