Original Author: Checkmate, Glassnode
Translation: Deep Tide TechFlow
Abstract
Bitcoin is famous for its volatility, but the current market is experiencing extreme volatility compression.
The futures market is noticeably stable, with both Bitcoin and Ethereum trading volumes reaching historic lows. Spot trading and arbitrage returns are at 5.3%, slightly higher than the risk-free rate.
The implied volatility in the options market is undergoing significant volatility compression, with volatility premiums at less than half of the 2021-22 benchmark.
The put/call ratio and 25-delta skew indicators are at historic lows, indicating a bullish bias in the options market, and the pricing of put options suggests very low future volatility.
A Calm Period
The Bitcoin market is experiencing a very calm period, with many volatility indicators at historic lows. In this article, we will explore the uniqueness of this quiet period from a historical perspective and then discuss how the derivatives market is pricing it.
Firstly, we note that the spot price of Bitcoin is above some widely observed long-term moving averages in the industry (111-day, 200-day, 365-day, and 200-week). The range of these averages goes from a low of $23,300 (200 DMA) to a high of $28,500 (111 DMA). The chart also highlights similar periods seen in the past two cycles, which often align with macro upward trends.
We can observe very similar situations using on-chain realized prices, which simulate cost bases for three cohorts:
🟠 The entire market (actual price).
🔴 Short-term holders (coins held for less than 155 days).
🔵 Long-term holders (coins held for more than 155 days).
The spot price once again is above these three models and shows strong consistency with the aforementioned classical technical analysis tools.
It has been 842 days since the peak of the bull market in April 2021. Compared to history, the recovery in 2023 is actually better, with a decline of -54% compared to the previous all-time high, while historically the decline was -64%.
We also note that before the market accelerated its retreat of -54%, there were 6 months of boring periods in the 2015-16 and 2019-20 cycles. This may indicate potential boredom in the future.
After the hot start in early 2023, both quarterly and monthly price performance has cooled down. We can once again see many similarities to previous cycles, with a strong initial rebound followed by a period of continued consolidation and volatility.
Bitcoin analysts often refer to this period as a re-accumulation phase.
Volatility Collapse
Bitcoin has experienced a significant decrease in volatility in the observation window of 1 month to 1 year in 2023, reaching multi-year lows. The one-year volatility level is now at levels not seen since December 2016. This is the fourth period of extreme volatility compression:
The bear market at the end of 2015 entered a re-accumulation phase in 2016.
The bear market phase in late 2018 happened before the 50% sell-off in November. However, a recovery bounce occurred in April 2019, with a rise from $4,000 to $14,000 within three months.
After March 2020, as the world adapted to the outbreak of COVID-19, the market consolidated.
At the end of 2022, there was a market correction, during which the market was digesting FTX's failure and our current market situation.
The price range between the highest and lowest prices within 7 days is only 3.6%. Only 4.8% of trading days have experienced a smaller weekly trading range.
The price range within 30 days is even more extreme. Within the past month, prices have fluctuated within a range of only 9.8%, with only 2.8% of months having a smaller range. This level of consolidation and price compression is very rare for Bitcoin.
This period of calm is also seen in the Bitcoin and Ethereum derivatives markets. For both assets, trading volumes of futures and options are near or at historic lows.
The trading volume for Bitcoin derivatives is currently at 19 billion USD, while the Ethereum market has a daily trading volume of only 9.2 billion USD, reaching its lowest point since January 2023.
The market continues to maintain a relatively risk-averse stance, with Bitcoin's dominance in the futures market gradually increasing. Between 2021 and 2022, the trading volume and open interest of Ethereum futures steadily increased compared to Bitcoin, reaching a peak of 60 BTC:40 ETH in the second half of 2022.
This year, Bitcoin has once again taken the lead, indicating that lower liquidity and decreased risk appetite are still driving forces for funds to move up the risk curve.
In the past month, the open interest in Bitcoin futures has also remained relatively stable at 12.1 billion USD. This is similar to the levels seen in the second half of 2022, when Bitcoin was about 30% cheaper than today and FTX Exchange was still active. It is also similar to the period of price increase in January 2021, when Bitcoin was 30% higher than it is now and the market was less mature, with leveraged speculation just beginning to heat up.
From a comparative perspective, the options market has experienced significant growth in dominance and growth, with open interest increasing by more than double in the past 12 months. Currently, the options market is on par with the futures market in terms of open interest.
On the other hand, the futures market has been steadily declining in open interest since the end of 2022 (during the FTX crash), with only a slight increase in 2023.
Due to the low trading volume and lack of activity in the futures market, the next goal is to identify the opportunities that will keep traders active in the digital asset derivatives field.
In the futures market, the term structure indicates that an annualized return between 5.8% and 6.6% can be achieved through cash arbitrage strategies. However, this is just slightly higher than the yield of short-term US treasuries or money market funds.
The perpetual contract market is the most liquid trading venue for digital assets where traders and market makers can lock in funding rate premiums to arbitrage futures and spot prices. This form of cash arbitrage is more volatile and dynamic, but with the additional risk considered, the current annualized return rate is 8.13%, which is more attractive.
It is worth noting that since the end of 2022, funding rates have consistently maintained stable positive growth, indicating a significant change in market sentiment.
In the options market, we can see the extent of volatility compression, with implied volatility for all expiring contracts reaching historic lows.
The Bitcoin market is highly volatile, with implied volatility for options trading ranging from 60% to over 100% for most of 2021-22. However, currently, the volatility premium in options pricing is at its lowest in history, with IV ranging from 24% to 52%, which is less than half of the long-term baseline.
IV (Implied Volatility) term structure shows that in the past two weeks, the volatility premium has been contracting. In just the past two weeks, the implied volatility of the December contract has dropped from 46% to 39%. The volatility premium of options expiring in June 2024 is slightly above 50%, which is relatively low historically.
Both in terms of trading volume and open interest indicators, the put/call ratio is at or near historical lows, with a trading range between 0.42 and 0.48. This indicates a net bullish sentiment in the market, with a continued dominance of demand for call options.
Therefore, relative to call options, put options have become increasingly cheaper, which is reflected in the historical low of the 25-delta skew indicator. Overall, this suggests that the options market (now comparable in size to the futures market) believes that future volatility will be at historically low levels.
Summary and Conclusion
Few news headlines proclaim Bitcoin as a price stable and non-volatile asset, making the case of monthly trading range below 10% unusually prominent. Currently, market volatility can be considered the lowest ever, raising questions about whether there will really be an intensification of volatility in the future.
The cash-futures arbitrage yield ranges from 5.3% to 8.1%, slightly higher than the risk-free rate of short-term US Treasuries. The implied volatility premium in the options market is at historically low levels, with particularly weak demand for put options.
Considering Bitcoin's volatility, are we entering a new era of price stability for Bitcoin, or is volatility being mispriced?
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