Bitcoin Price and Implied Volatility Show Negative Correlation

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Bitcoin Price and Implied Volatility Show Negative Correlation

Bitcoin (BTC) and the correlation between the cryptocurrency market’s price movement and implied volatility has turned negative again. The negative correlation suggests that investors expect the price of the crypto king to move downward, signaling a significant shift.

FTX Blow to Bitcoin Price

Bitcoin’s price and the forward 30-day implied volatility indicator for the crypto king have started to move in opposite directions. According to market observers, the reversal to negative correlation reflects concerns that bankrupt crypto exchange FTX will liquidate its reserves of cryptocurrencies. According to Velo Data, the correlation between Bitcoin’s price and 60-day implied volatility turned negative a week ago and fell to -0.29 earlier today.

As the bankrupt crypto exchange FTX is considering seeking court approval to start selling its $3.4 billion worth of cryptocurrencies, Bitcoin’s price hit its lowest level in three months, dropping below $25,000 on September 11. Furthermore, the price of the crypto king has dropped by nearly 10% in the past four weeks. The BTC DVOL Index, which measures 30-day implied volatility by leading crypto options exchange Deribit, has risen from 32 to 42 in the past four weeks.

The increase in implied volatility along with the price decline indicates a preference for put options, which provide protection against price declines. Implied volatility expresses investors’ expectations of price movements during a specific period and is influenced by demand for both call and put options. Observers believe that the current negative correlation is driven by the expectation of avoiding potential risks related to FTX and taking positions accordingly.

Jeff Anderson, a senior trader at STS Digital, commented on the matter to CoinDesk, saying, “The market spent the past few months preparing for a potential spot ETF approval, so it was very concerned about asymmetric movements to the upside. However, with news of FTX liquidating its cryptocurrencies and concerns about a possible bottom in spot prices, this sentiment has changed in recent days. As a result, implied volatility has risen as spot prices are perceived to be in a weak area.”

Griffin Ardern, a volatility trader at crypto asset management firm Blofin, highlighted that the change in volatility trend is also driven by concerns over global market tightening measures, stating, “The upcoming US CPI data for August, which will likely show an increase in inflation, suggests that the Fed will probably take additional liquidity tightening measures to prevent reflation. When it comes to reallocating liquidity, cryptocurrencies are given the lowest priority. This implies that liquidity held in cryptocurrencies could be withdrawn and invested in cash or assets such as US stocks.”

Eyes on US CPI Data

Both global markets and the cryptocurrency market are closely watching the US CPI data for August. According to RBC Economics, the annual CPI figure, which stood at 3.2% in July, will rise to 3.6% in August.

Indeed, many leading indicators warn that inflation will rise in the coming months. This indicates that the Fed will not be able to lower interest rates and inject liquidity into the market in the near future, and that a tight monetary policy will be maintained.


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