Bitcoin’s Wall Street-like fear indicator has spiked to its highest level since the FTX exchange crash in 2022, indicating intense panic in the market as prices plummeted to nearly $60,000.
Volmex’s Bitcoin Volatility Index (BVIV), which represents expected price turbulence annualized over four weeks, jumped to nearly 100% from 56% on Thursday.
The index serves as a crypto equivalent to Cboe’s VIX, the so-called fear/panic indicator, which indicates the 30-day implied volatility of the S&P 500 and rises during market panics when traders raise option prices to protect against index declines.
The BVIV does the same more often than not, rising during market panics, as seen on Thursday.
“A wave of panic swept through crypto markets this week, correlated with strong risk aversion across several asset classes. Bitcoin’s 30-day implied volatility, as measured by the BVIV index, rose from just over 40 to 95 in a matter of days, levels not seen since the infamous FTX crash in late 2022,” Cole Kennelly, founder and CEO of Volmex Labs, told CoinDesk in a Telegram chat.
Implied volatility is influenced by the demand for options or derivative contracts that help traders make asymmetric profits from bullish trends in the underlying asset and hedge downside risks. Call options are used to bet on the upside, while put options are typically purchased as insurance against price declines.
On Thursday, traders rushed to buy options listed on Deribit, especially puts, as the price of bitcoin plummeted from $70,000 to nearly $60,000. The five most traded options in the last 24 hours are puts with strike prices ranging from $70,000 to $20,000, according to data source Deribit Metrics. The $20,000 put option represents a bet that prices will fall below that level.
“Volatility markets reacted sharply to last night’s price drop. Initial volatility increased as traders adjusted to gamma [near-term risks]. Short-term volatilities led the rise, showing greater demand for protection, while long-term volatilities lagged, keeping the volatility curve sharply inverted,” Jimmy Yang, co-founder of institutional liquidity provider Orbit Markets, told CoinDesk.
Yang’s clients rushed to buy downside protection, fearing that falling prices could devastate digital asset treasuries that were buying bitcoin at higher levels. These companies could now be liquidated at a loss, causing a deeper drop in the price of bitcoin.
“With significant uncertainty still ahead, particularly around DATs and the risk of further reversal cascades, we have seen strong demand for protection from clients,” he added.
Bitcoin price has rebounded to over $64,000 as of this writing, a more than 5% recovery from overnight lows, according to data from CoinDesk. Yang expects volatility to stabilize.
“Sentiment is deep in extreme fear, but bitcoin price appears to have found a base near $60,000. If price action stabilizes, volatility appears exaggerated and could retreat quickly,” he said.
