Bitcoin price key indicator shows: investor panic has decreased after halving

Bitcoin’s implied volatility has dropped dramatically following the halving, but what does this mean for Bitcoin investors?

The latest data from Skew shows that Bitcoin (BTC) implied volatility has dropped significantly following yesterday’s halving. Typically, volatility is central to all professional traders as it measures the average daily price fluctuations to provide insight into market conditions.

As Cointelegraph previously reported, BTC’s halving events tend to increase volatility due to their huge uncertainty. Traders expect that BTC prices will either surge or plummet during or after the halving, hence the short-term spike. At the time of writing, the indicator has returned to its previous levels.

Uncertainty leads to volatility

Over the past few months, analysts have been circulating the theory that the BTC hashrate could drop significantly after the halving, with speculation that this could be caused by miners shutting down their ASICs as the BTC block reward is cut from 12.5 BTC to 6.25 BTC.

To this day, there are legitimate concerns about a “death spiral” that would force large miners to sell their machines and potentially bankrupt over-leveraged miners. One possible reason for this is that revenue, which is vital to miners, has been cut.

Keep in mind that transaction fees rarely exceed 5% of miner revenue, the bulk of which is BTC block rewards. Cutting the mining industry’s $5 billion in revenue in half could have all sorts of unintended consequences, including a hard fork.

Traders rely on implied volatility, and the halving affects this metric.

BTC ATM Implied Volatility Source: Skew

There are two ways to measure volatility, one is to use historical data, the other is to analyze the current option market premium. It is worth noting that historical data has a disadvantage when dealing with price-sensitive events because it favors past movements.

For Bitcoin, volatility has continued to decline since it peaked after Bitcoin plummeted to $3,600 on March 12. Entering May, as the Bitcoin halving approaches, Bitcoin implied volatility has stabilized at around 80%.

Options markets offer a perfect way to gauge potential price swings because they rely on traders’ skin-in-the-game. Options sellers are demanding higher premiums, reflecting their heightened concerns about future volatility.

As shown in the figure below, ATM options mean that the strike price unit used for calculation is in the currency, which means that the current BTC base price of $8,900 is $9,000.

Call option pricing Source: Deribit

These are a measure of volatility because they have little intrinsic value. A call option with a $7,000 strike price has an intrinsic value of $1,900 because Bitcoin is trading well above that level.

How traders explain the drop in implied volatility

Peak implied volatility means that option market premiums have surged. This should be interpreted as the market charging more for insurance, both for calls and puts.

The basic strategy of buying call options provides protection if the market rises. By paying a premium upfront, one can then acquire BTC at a predetermined price. The opposite applies to put option buyers, who buy insurance against a sudden drop in prices.

One thing to note is that changes in volatility are neither a bullish nor a bearish indicator. Abnormally high levels reflect uncertainty and should prompt traders to ensure stop-loss orders are in place and to deposit large margins for leveraged trades.

Low volatility does not mean low risk

Some traders tend to infer that low volatility conditions mean a lower risk of an unexpected downturn. Rest assured, there is no such indicator. One should use such periods to take insurance positions through the options market.

On the other hand, if traders are caught off guard by high volatility, they should close all positions to avoid unnecessary stop-loss executions, or be prepared for the certainty of leveraged traders being liquidated during large moves up or down.

For more on how to navigate the intricacies of the cryptocurrency market, see 10 Tips to Ensure Your Crypto Portfolio Remains Profitable During a Crisis.

Original link: https://cointelegraph.cn.com/news/key-bitcoin-price-metric-shows-drop-in-investor-fear-after-btc-halving