Bitcoin's 30-day volatility drops to 17-month low

Original article: Coindesk

Compiled by: Zeqi YI

According to data provided by Arcane Research, Bitcoin's 30-day volatility, which measures the standard deviation of daily returns over a four-week period, has fallen to 2.20%, the lowest value since November 5, 2020. The indicator peaked at more than 6% in June 2021 and has been trending downward since then, except for a brief spike to 4.5% around the Federal Reserve (FED) meeting in March this year. The steady decline can be attributed to several factors, including the decision by dominant cryptocurrency exchanges Binance and FTX to cut leverage, a decline in interest in cryptocurrency profit futures, and a recent reduction in the speculative nature of retail investors, all of which ultimately contributed to the decline in trading volume.

Weekly trading volumes for Bitcoin (BTC) and Ethereum (ETH) have fallen to their lowest levels since the summer of 2021, according to data tracked by Kaiko Research.

Kaiko Research said in a weekly report published on Monday that “both BTC and ETH trading volumes have fallen sharply since December as investors have chosen to reduce the risk of their portfolios amid growing macro uncertainty. This trend further intensified in April this year, with weekly trading volumes for BTC and ETH falling by more than 30% from the end of March to $7 billion and $5 billion, respectively.”

Invisible Force

In addition to the factors mentioned above, some other technical factors may also have led to such a result.

According to Two Prime, market makers purchase out-of-the-money call and put options auctioned in the DeFi Options Vault (DOVs) every Friday, hedging their call/put risk through opposite positions in the futures and perpetual swap futures markets, thereby creating a weekly boundary on prices in the process.

Market makers are individuals or entities that are contractually obligated to maintain healthy liquidity levels on an exchange. They ensure that there is enough depth in the order book by offering to buy or sell an asset, futures contract, or call or put option at any given point in time. These entities always take the opposite side of investors' trades, maintaining a market-neutral book by buying and selling the underlying asset as prices fluctuate.

Since the second half of 2021, DOVs have multiplied and now add more than $100 million of notional risk to the market each week. In other words, the sensitivity of market makers’ books to directional shifts is increasing. As a result, their hedging behavior may help curb large price swings in the market.

“When holding a larger open interest there is also a need for a larger hedging activity,” Two Prime said in an April 8 explanation of DOVs. “This creates a natural price floor or ceiling on the spot price of the short strike (the level at which DOVs sell options). By holding these options to expiration, as DOVs do, the gamma of the underlying options increases, thus requiring more delta hedging from market makers, further solidifying this price floor and ceiling dynamic.”

The calm before the storm?

Long periods of low price volatility often end with sharp price swings on both sides. For example, Bitcoin’s low volatility regime lasted for more than two months in 2020, with Bitcoin prices fluctuating mainly in the range of $10,000 to $13,000 from late September to early November. It was not until November 5 that Bitcoin prices rebounded to well above the high of $13,800 in June 2019.

Whether history will repeat itself is anyone’s guess. That said, there are signs that a big move could happen soon. “The 7-day volatility has climbed above the 30-day volatility, which could be a sign that the market is awakening,” Arcane Research said in its weekly newsletter on Tuesday. At press time, the price of Bitcoin has surpassed $41,800, up more than 2.5% in 24 hours.