Volatility and Bitcoin: What You Need to Know

A Deep Dive into Market Mechanics

3 min readJan 3, 2024

The volatility of Bitcoin’s spot price has always been a hot topic among investors, traders, and naysayers alike.

We recently entered a unique phase in Bitcoin’s history, marked by record low volatility levels. Yet, many still don’t consider the nuances of what volatility can tell us about the market.

The Essence of Bitcoin Volatility

Bitcoin volatility, simply put, expresses how much the Bitcoin spot price varies.

There are 2 indices that measure Bitcoin volatility:

  1. Bitmex Volatility Index (BVOL): Measures realized volatility, the volatility actually observed in the market
  2. Deribit Implied Volatility Index (DVOL): Measures implied volatility, the volatility predicted by option prices.

Really, volatility is just a term traders use to represent standard deviation.

For example, a DVOL of 45 suggests the market expects a one standard deviation move of 45% in Bitcoin’s price over the next 30 days. This implies a 67% probability of Bitcoin trading within a +/-45% price range.

However, it’s crucial to understand that volatility indices are not crystal balls. They tell us what the market is expecting, but do not guarantee specific future prices or direction.

Deribit offers a fantastic formula to interpret DVOL values: in order to determine the expected daily move of Bitcoin, take the DVOL value and divide it by 20. For example, if the DVOL value is 90, the expected daily move is roughly 4.5%.

The Dance of Options and Volatility

For structured products protocols like us, understanding the influence Bitcoin volatility has on options prices is essential.

Simply put, option prices are positively correlated to volatility.

High Bitcoin volatility increases the likelihood of significant price movements, which raises the chances of options expiring in-the-money, which in turn leads to higher option prices.

Conversely, low Bitcoin volatility results in lower option prices. Stability in Bitcoin prices reduces the probability of options expiring in-the-money.

Let’s Get Technical

Bitcoin volatility isn’t just useful for its relationship with option prices, it can also give interesting insights into market trends.

From July 2023 to October 2023, for example, the volatility values on both the BVOL and DVOL indices hit the lowest levels in recorded history. The values on the BVOL even breached the historic low we only have seen twice before: in October 2018 and December 2022. DVOL, on the other hand, has been in a steady grind lower to levels we have never seen since the index’ inception in March 2021.

DVOL — 2 years

The last two times volatility was this low, the price action that followed can only be described as explosive.

BVOL (below) compared against BTCUSD (above)

In October 2018, after an excruciating lull of low volatility, Bitcoin prices dropped over 50% in just two months; from $6k to sub $3k. Fast forward to December 2022 where Bitcoin was like a phoenix rising — Bitcoin’s spot price rose from the post-FTX lows of 16k up to 24k — a whopping 50% increase in merely 4 weeks.

Suffice to say, low volatility often precedes major moves in the market.

Navigating the Uncertain

Bitcoin volatility, while complex, is a fascinating aspect of the markets. It plays a pivotal role in shaping trading and options strategies. When we observe historical lows in volatility indices, it becomes more important than ever for traders and investors to stay informed and adapt their strategies accordingly.

Remember, navigating and interpreting volatility is about understanding uncertainty, not predicting the future.

Volatility provides a ruler to measure probabilistic outcomes, and understand the potential for markets to move within an expected range. Investors who appreciate this critical component of the market are able to use this information to their advantage and generate intelligent returns through risk managed investing. Stay informed and trade wisely.

Better yet, earn wisely with Hermetica option vaults.




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