Bitcoin ‘volatility index’ reaches peak following FTX collapse as prices plunge to nearly $60,000.

Bitcoin’s volatility index, the BVIV, surged to almost 100%, marking its highest point since the 2022 FTX collapse.

Bitcoin volatility reaches peak since FTX’s collapse. (TyliJura/Pixabay)

Essential information:

• Bitcoin’s volatility index, the BVIV, surged to nearly 100%, its highest point since the 2022 FTX collapse.
• Traders hurried to purchase put options, indicating strong demand for protection against additional declines.
• Volatility appears to be overstretched and may decrease if prices stabilize.

Bitcoin’s Wall Street-style fear index has risen to its highest level since the FTX exchange’s collapse in 2022, indicating significant market anxiety as prices fell to just below $60,000.

Volmex’s bitcoin volatility index (BVIV), which indicates the anticipated annualized price fluctuations over four weeks, increased to nearly 100% from 56% on Thursday.

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This index acts as a crypto counterpart to Cboe’s VIX, known as the fear/panic gauge, which reflects the 30-day implied volatility of the S&P 500 and rises during market disturbances as traders increase options prices to hedge against downturns in the index.

The BVIV similarly tends to increase during market distress as evidenced on Thursday.

"A wave of panic swept through crypto markets this week, correlated to a sharp risk-off move across various asset classes. Bitcoin’s 30-day implied volatility, as measured by the BVIV Index, surged from just over 40 to 95 in a matter of days, levels not seen since the notorious collapse of FTX at the end of 2022," Cole Kennelly, founder and CEO of Volmex Labs, shared with CoinDesk in a Telegram conversation.

Implied volatility is affected by the demand for options, or derivative contracts that enable traders to achieve asymmetrical profits from upward trends in the underlying asset and hedge against potential losses. Call options are utilized to speculate on increases, whereas put options are generally acquired as insurance against price drops.

On Thursday, traders rushed to acquire Deribit-listed options, particularly puts, as bitcoin’s price fell from $70,000 to close to $60,000. The top five most traded options in the last 24 hours were all puts at strike prices varying from $70,000 to $20,000, according to data from Deribit Metrics. The $20,000 put signifies a bet that prices will drop below that threshold.

"Volatility markets reacted sharply to last night’s price drop. Front-end volatility surged as dealers adjusted for gamma [near-term risks]. Short-dated vols led the increase, reflecting heightened demand for protection, while longer-dated vols trailed, causing the volatility curve to remain steeply inverted," Jimmy Yang, co-founder of institutional liquidity provider Orbit Markets, informed CoinDesk.

Yang’s clients hurried to secure downside protection, apprehensive that the price decline could severely impact digital asset treasuries that acquired bitcoin at elevated prices. These firms might now face liquidation at a loss, exacerbating the downward trend in bitcoin’s price.

"With considerable uncertainty still on the horizon — especially regarding the DATs and the risk of additional unwind cascades, we’ve observed significant client demand for downside protection," he added.

Bitcoin’s price has rebounded to over $64,000 at the time of this writing, representing a more than 5% recovery from overnight lows, based on CoinDesk data. Yang anticipates that volatility will stabilize.

"Sentiment is deeply entrenched in extreme fear, yet bitcoin’s price appears to have established a base around $60K. If price movement stabilizes, volatility seems extended and could quickly retract," he stated.