A recent observation in the cryptographic currency world suggests a heightened state of vigilance among traders. The current relative intensity of out-of-the-money call and put options associated with Bitcoin indicates that market players are factoring in what is cryptically termed “tail risk”. This ensues from the dread of the likelihood that Bitcoin, which had been stagnating at approximately $26,000 since experiencing a plunge exceeding 10% within the week closing on August 20th, might move three standard deviations from its existing cost due to an exceptional event.
In essence, tail risk amplifies the probability that an investment’s move will exceed three standard deviations from the average. This points to possible disruptions spurred by rare events. One should also note that the cryptocurrency’s annualized seven-day historical or realized volatility has decelerated to 26% from nearly 60%, a development noted early in the same week, according to data by Amberdata.
The Butterfly index offered further insights. This metric shows how the relative intensity of the out-of-the-money (OTM) higher strike call options and lower strike put options compares with crypto exchange Deribit’s Bitcoin volatility index (DVOL) and the at-the-money (ATM) volatility. An enhanced index, therefore, suggests either a surge in call options at strikes that surpass Bitcoin’s ongoing price or lower than Bitcoin’s prevailing market rate, or impending options (wings).
Griffin Ardern, a volatility trader at the crypto-asset management firm Blofin, added that Bitcoin’s butterfly index has hit yearly peaks, indicative that the market is pricing in tail-risk. Conversely, cryptocurrency traders perceive the narrowing spread between Deribit’s DVOL and at-the-money volatility as a potent warning that points to looming tail risk and the resultant market uncertainty, despite outward volatility metrics suggesting price stability.
The tail-risk considerations are in line with the prevailing macroeconomic ambiguities. Last Friday saw the Federal Reserve Chairman, Jerome Powell, reiterating his institution’s commitment to sustaining the 2% inflation target. The cautionary curveball he threw was that monetary policy would remain stringent for a longer duration than previously anticipated, hinting that obtaining the inflation goal might require substandard growth, and thereby affect jobs.
The crypto market is likely to sustain the bull-and-bear standoff, reflected in the OTM calls and puts dynamics, ahead of the impending nonfarm payrolls report release. This anticipation teases of a tail risk on the horizon. Considering the Federal Reserve’s heightened inclination towards tightening and the consequent hike in bond yields to their highest since 2007, cryptocurrencies are treading a shaky path.
Source: Coindesk
