Bitcoin rebounded to above $38,000 in the short term, and the implied volatility indicator suggested signs of a market recovery

The crypto market experienced a sharp reversal on Thursday and continued its rally into Friday. According to Bitpush terminal data, the intensified conflict between Russia and Ukraine once caused Bitcoin to fall to nearly $34,000. As US President Biden announced broader sanctions against Russia, the bulls made a comeback. Bitcoin soared 10% in the past 24 hours, reaching a high of nearly $40,000. As of press time, the rally has retreated slightly and the trading price is around $38,700.

Data provided by derivatives research firm Skew showed that Bitcoin's one-week implied volatility jumped to 75% annualized on Thursday, surpassing the one-month, three-month and six-month indicators, as Russia's invasion of Ukraine caused investors to sell risk assets and favor gold and fiat currency havens.

Implied volatility refers to investors' expectations of price fluctuations over a specific period of time. Although this indicator is forward-looking, it cannot fully predict the direction of upcoming price changes.

The indicator depends primarily on demand for options, which are hedging instruments. Therefore, a sudden rise in implied volatility is considered to represent uncertainty, while an inverted structure where short-term implied volatility is larger than the long-term indicator indicates panic.

Historically, inverted structures have marked price bottoms. Robbie Liu, a researcher at crypto financial services provider Babel Finance, told CoinDesk: “Bitcoin’s short-term implied volatility exceeding long-term implied volatility suggests a possible market reversal. A similar trend was observed after the May 2021 crash.”

The last time the one-week implied volatility exceeded the long-term indicator was on January 24, when Bitcoin fell to a six-month low below $33,000. Bitcoin gained momentum the next day and reached a high of more than $45,000 earlier this month. The sell-off in early December has lost momentum, and the one-week implied volatility indicator is well above the six-month indicator.

Bitcoin bottomed in late September 2021 and in May-June 2021, coinciding with the expectation of short-term volatility sending panic signals.

If historical trends are a guide, Bitcoin could build on Thursday’s rebound from a low below $34,500. But cryptocurrencies remain vulnerable to risk aversion in stocks, with Robbie Liu saying: “This is just a short-term rebound and does not mean BTC will not fall below $34,000 in the medium term.”

While this was a sudden and unexpected rebound for investors, it is unclear how long it will last, with macro concerns and uncertainty surrounding the Russia-Ukraine war remaining.