Author: Checkmate, Glassnode; Compiler: Deep Tide TechFlow

Summary

• Bitcoin price is known for its volatility, yet the market is currently experiencing extreme volatility compression.
• The futures market was notably flat, with both bitcoin and ethereum trading at all-time lows, with spot trades and arbitrage yields at 5.3%, slightly above the risk-free rate.
• Implied volatility in options markets is experiencing significant volatility compression, with volatility premiums at less than half of the 2021-22 benchmark.
• Both the put/call ratio and the 25-delta skewness indicator are at historically low levels, indicating that the options market is skewed bullish, while the pricing of puts suggests very little future volatility.

A time of calm

The Bitcoin market is going through a very quiet period, with many volatility indicators falling to all-time lows. In this article, we look at what was remarkable about this quiet period from a historical perspective, and then how it was priced in by the derivatives market.

First, we note that the Bitcoin spot price is above some of the industry-widely observed long-term moving averages (111-day, 200-day, 365-day, and 200-week). These averages range from a low of $23,300 (200DMA) to a high of $28,500 (111DMA). The chart also highlights similar periods in the past two cycles that tend to align with macro uptrends.

We can observe a very similar situation using on-chain realized prices, which model the cost base of three groups:

The entire market (real prices).

Short-term holders (coins held for less than 155 days).

Long-term holders (coins held for more than 155 days).

The spot price is again above all three models and shows strong alignment with the classic technical analysis tools mentioned above.

842 days have passed since the April 2021 bull market high. The recovery in 2023 is actually better compared to history, with a -54% decline from the all-time high compared to a -64% decline historically.

We also note that both the 2015-16 and 2019-20 cycles experienced 6 months of sideways boredom before the market accelerated above the -54% retracement level. Perhaps this is an indication of the boredom that may lie ahead.

After a torrid start to early 2023, both quarterly and monthly price performance has cooled. Again, we can see many similarities with previous cycles, that is, the rebound from the bottom has strong initial momentum, but then enters a period of continuous shock consolidation.

Bitcoin analysts often refer to this period as the re-accumulation period.

Volatility Crash

Bitcoin’s realized volatility fell sharply over the 1-month to 1-year observation window in 2023, reaching multi-year lows. 1-year volatility levels are now at levels not seen since December 2016. Here is the fourth period of extreme volatility compression:

• The bear market of late 2015 entered a reaccumulation period in 2016.
• The bear market in late 2018 preceded a 50% sell-off in November. However, this was followed by a recovery rally in April 2019, rising from $4,000 to $14,000 in three months. *Markets consolidate after March 2020 as the world adjusts to the COVID-19 outbreak.
• A market break in late 2022, when the market is digesting the failure of FTX, and our current market conditions.

The price range between the highest and lowest prices within 7 days is only 3.6%. Only 4.8% of sessions ever experienced a smaller weekly trading range.

The 30-day price range is even more extreme, with prices fluctuating in just a 9.8% range over the past month, while only 2.8% of months have been narrower than that. This level of consolidation and price compression is a very rare event for Bitcoin.

This period of calm is also visible in the derivatives markets of Bitcoin and Ethereum. For both assets, futures and options are trading near or at record lows.

Bitcoin's derivatives trading volume is currently at $19 billion, while the Ethereum market is trading only $9.2 billion per day, hitting a January 2023 low.

The market also maintains a relatively risk-averse stance, with Bitcoin gradually increasing its dominance in the futures market. During 2021-2022, the trading volume and open interest of the Ethereum futures market will increase steadily relative to Bitcoin, and reach a peak of 60 BTC : 40 ETH in the second half of 2022.

Bitcoin has once again taken the upper hand this year, suggesting that lower liquidity and reduced risk appetite remain forces pushing money up the risk curve.

Over the past month, Bitcoin’s open interest in the futures market has also been relatively stable at $12.1 billion. This is similar to the level in the second half of 2022, when the price of Bitcoin is about 30% cheaper than today, and the FTX exchange is still active. It's also similar to the January 2021 rally, when bitcoin prices were 30% higher than they are now, the market was less mature, and leveraged speculation was just picking up steam.

From a comparative perspective, the options market has seen a notable increase in dominance and growth, with open interest more than doubling over the past 12 months. The options market now rivals the futures market in terms of open interest.

Open interest in the futures market, on the other hand, has been steadily declining since the end of 2022 (when FTX crashed), with only a slight increase in 2023.

With little volume and lackluster activity in the futures market, the next goal is to identify what opportunities are keeping traders active in the digital asset derivatives space.

In the futures market, the term structure suggests that an annualized rate of return in the range of 5.8% to 6.6% can be obtained through the spot arbitrage strategy. However, this is only slightly higher than the yield on short-term U.S. Treasury bonds or money market funds.

The perpetual contract market is the most liquid trading place in digital assets, where traders and market makers can lock in the funding rate premium to arbitrage futures and spot prices. This form of spot arbitrage is more volatile and dynamic, but given this additional risk, the current annualized yield of 8.13% is more attractive.

It is worth noting that since the end of 2022, the funding rate has maintained a steady positive growth, which indicates a significant change in market sentiment.

In the options market, we can see the severity of the volatility compression, with implied volatilities falling to all-time lows to all contract expirations.

The Bitcoin market is extremely volatile, with options trading implied volatility ranging from 60% to over 100% for most of 2021-22. Currently, however, option pricing volatility premiums are historically minimal, with IVs ranging from 24% to 52%, less than half of the long-term baseline.

The IV (implied volatility) term structure shows that the volatility premium is contracting over the past two weeks. Implied volatility for the December contract has fallen from 46% to 39% in the past two weeks alone. The volatility premium for options expiring in June 2024 is just over 50%, which is relatively low historically.

On both the volume and open interest metrics, the put/call ratio is at or near record lows, trading in a range between 0.42 and 0.48. This suggests that there is a net-long sentiment in the market, with demand for call options still dominating.

As a result, puts have become increasingly cheaper relative to calls, as reflected in the all-time lows in the 25-delta skewness indicator. Overall, this suggests that the options market (now about the same size as the futures market) sees future volatility at historically low levels.

Summary and Conclusion

Few headlines proclaim Bitcoin as a price-stable and non-volatile asset, which makes the sub-10% monthly trading range stand out. Right now, market volatility is arguably the lowest it has ever been, raising questions about whether heightened volatility is really in store for the future.

Futures cash carry yields range from 5.3% to 8.1%, slightly higher than the risk-free rate on short-dated U.S. Treasuries. The implied volatility premium in the options market is at an all-time low, and demand for put options in particular is the thinnest.

Given Bitcoin’s volatility, are we ushering in a new era of Bitcoin price stability, or is volatility mispriced?