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Last week, the cryptocurrency market faced a significant sell-off that drove Bitcoin’s price down to as low as $25,000. This abrupt market shift concluded several months of extraordinary stability in the crypto space.
Prior analysis from CryptoSlate identified the derivatives market as the main driver behind the intense sell-off. The futures market experienced a considerable deleveraging event, leading to the liquidation of over $2.5 billion in perpetual futures contracts within a single day.
Conversely, the options market displayed notable resilience amid Bitcoin’s price drop. Data from Glassnode revealed a steady open interest for both call and put options, suggesting that these financial instruments were largely insulated from the market turbulence.
Graph illustrating the open interest for Bitcoin puts and calls YTD (Source: Glassnode)
Nonetheless, the options market did not remain entirely unaffected. A significant change observed was the aggressive repricing of volatility.
Implied volatility, a market indicator that forecasts the potential extent of asset price changes based on options pricing, had been exceptionally low throughout the summer. This metric is crucial to track as it offers insights into anticipated price movements, impacting trading strategies.
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The calmness in implied volatility was disrupted last week during Bitcoin’s price decline. The drop to $25,000 resulted in the implied volatility for options set to expire within a week nearly doubling. Specifically, it increased from 22.15% on August 12 to 52.35% on August 18.
Graph depicting the implied volatility for Bitcoin options from May 21 to Aug. 22, 2023 (Source: Glassnode)
Another significant metric that experienced a notable change was the 25 delta skew for options. This skew, which assesses the difference in implied volatility between out-of-the-money puts and calls, jumped from -15.8% to 16.9% for options expiring in one week. A positive skew indicates that puts are more costly than calls, reflecting a greater demand for downside protection and a bearish outlook.
Graph showing the options 25 delta skew from May 21 to Aug. 22, 2023 (Source: Glassnode)
While the recent volatility in the crypto market unsettled various sectors, the options market remained a pillar of stability, at least regarding open interest. However, the sharp changes in implied volatility and the 25 delta skew highlight the market’s increased sense of uncertainty and caution.
The post Bitcoin dips but options market holds steady appeared first on CryptoSlate.
