Perplexing Tranquility? Bitcoin's Implied Volatility Hits Lowest Since October 2020

There is an uncanny sense of calm in the bitcoin (BTC) market despite lingering FTX contagion fears and macroeconomic uncertainty. Analysts are scrambling to explain the perplexing tranquility.

Bitcoin's annualized seven-day implied volatility (IV), or the options market's forecast of a likely movement in the underlying asset, has declined to a two-year low of 38.2%, according to data source Amberdata.

The metric – often equated with the degree of uncertainty or fear – peaked at 145% on Nov. 9 and has been falling since, even as the FTX contagion spreads and experts fear a wave of miner bankruptcies.

To Markus Thielen, head of research and strategy at Matrixport, the declining volatility is not surprising.

"Volatility expectations will continue to drop. Lower volatility is one of my favorite trades for 2023," Thielen told CoinDesk. "The macro outlook is extremely constructive, with inflation falling like a rock and the recent decline in oil making the Ukraine war less relevant."

Thielen added that the FTX headlines will now have less impact on the market, with investigations doing the dirty work in the background and cited China's recent decision to relax inflationary COVID-19 restrictions as a source of downward pressure on implied volatility.

Negative headlines have had less impact on bitcoin's price of late. The cryptocurrency has risen 9% to $17,700 since crypto lender BlockFi filed for bankruptcy on Nov. 28. Dominant crypto exchange Binance’s health came under extra scrutiny early this week, with clients withdrawing large sums of their coins. Bitcoin has managed to eke out 3% gains for the week.

Perhaps traders have moved on from the FTX collapse, having bought options to hedge their exposure following the FTX debacle, pushing implied volatility higher at that point.

"Market participants have already hedged contagion implications, which are still relevant, but the hedging occurred when the market was in a more fearful state, leading the hedging costs to grow," Vetle Lunde, research analyst at Arcane, said.

"The current low IV regime reflects that traders are satisfied with the current exposure (hedges already in play) and expectations of less volatility in the foreseeable future," Lunde noted.

Options activity picked up pace in mid-November as traders bought ether, solana and bitcoin put options to hedge downside risks, while users with funds locked on FTX switched to trading futures on other exchanges.

Or maybe crypto traders have just had their fill of 2022 already.

Volumes in both spot and derivatives markets have crashed since then, indicating market stagnancy. That's typical of the pre-holiday season lull.

Institutional interest has dwindled, as evidenced by the decline in active bitcoin futures contracts on the Chicago Mercantile Exchange (CME). The so-called futures open interest has dropped to 69,000 contracts, the lowest since October.

The share of non-exchange-traded funds (ETF) in the open interest has hit an all-time low of nearly 41%.

"In the light of muted activity and expected slow times ahead, it's likely that volatility will continue to compress, which in turn is reflected in options," Lunde said.