Buyers with Bitcoin choices are beginning to hedge in opposition to a potential worth decline
Bitcoin's options market data shows that investors are starting to position themselves for a temporary retreat from the cryptocurrency's steep upward trend.
The one month implied volatility, which is influenced by the demand for call and put options, rose in the last two days from around 55% to a four-month high of 70.5%, suggesting heightened expectations for price turbulence in the next four Weeks suggesting.
The one-month display is currently 65%. Long-term implied volatility metrics have also bounced back from recent lows.
In addition, the negative spread between the cost of puts (bearish bets) and calls (bullish bets) has narrowed, as shown by the one-, three- and six-month recovery in put-call skews. According to the data source Skew, the one-month display increased from -27% to -14%.
These numbers suggest increased demand for put options – a sign that investors are protecting themselves against a possible price decline. While buying calls can and does lead to an increase in the implied volatility metrics, in this case the put-call offset has rebounded along with the increase in volatility, indicating an increase in the demand for puts.
That assessment is borne out by Deribit Insights' tweet, which states that institutions have bought put options. This does not necessarily mean a bearish trend, but could be a hedging strategy against a long or bullish position on the spot market.
Options are derivative contracts that give the buyer the right, but not the obligation, to buy or sell the underlying asset on or before a specified date at a specified price. A call option gives the right to buy and the put option gives the right to sell. Implied volatility, a key component in calculating the price of an option, is the expected standard deviation of returns over a selected time period and is expressed on an annual basis.
Fears of a deeper decline in Bitcoin price and demand for puts appear to have been fueled by the volatile price movements of the past 36 hours. Bitcoin rose to $ 18,358 during Wednesday's Asian trading hours, only to pull back quickly to $ 17,200. According to Shaun Fernando, Head of Risk and Product at Cryptocurrency Exchange Deribit, volatility spikes and put-call skew have increased as traders hedge their bullish sentiment with puts.
The renewed interest in the put options comes from Bitcoin's recent vertical rally from $ 10,000 to over $ 18,000. The cryptocurrency has been corrected several times by more than 20% in the previous bull markets. This time around, a bull market correction has been elusive, possibly due to a supply deficit in the market.
According to technical studies, however, the upward trend could lose some of its momentum.
Both the long top wick on Wednesday's undecided candle and the value above 50 on the relative strength index indicate the bull's fatigue. "The cryptocurrency could face some selling pressure if prices on Thursday (UTC) end below the low of $ 17,100 on Wednesday," Patrick Heusser, a leading cryptocurrency trader at Crypto Broker AG in Zurich, told CoinDesk.
The broader trend remains constructive as the three and six month put-call skews report negative values and macro factors that are biased in favor of scarce assets like Bitcoin.
At the time of going to press, the cryptocurrency was trading at $ 17,977, according to The CoinDesk 20.