Bitcoin volatility explodes, reflecting ‘short squeeze,’ bullish options bets

Volatility across the crypto derivatives market leaped to fresh local highs this week following a surge led by major blue chip asset bitcoin (BTC).

A two-month period of relatively muted market activity had placed the world’s largest digital asset in relative stasis, trading within a $2,000 range. But on Monday, the market sprang to life, with a 14% rise in the asset’s price topping out at just above $35,000 on Tuesday.

That activity caused a flush of large leveraged short positions, creating a short squeeze — short sellers closing out their positions “en mass” — Bradley Duke, chief strategy officer at ETC Group told Blockworks.

“Only hindsight will be able to tell us if this rally actually has legs, but it feels like enthusiasm for bitcoin is starting to return,” he said.

Open interest for bitcoin futures initially tanked on the back of those liquidations, wiping roughly $1 billion from the market. That has since retraced, indicating new contracts are being opened post-rally, according to Aditya Jalan, APAC trading manager at FalconX.

Interestingly, open interest in listed BTC options on Deribit has increased to $13 billion and is now at the highest level in USD terms since the bull market of Q4 2021, Jalan said. 

Blockworks was told by several analysts that options trading tends to attract a more professional audience compared to futures trading, leading to fewer retail investors participating in this segment of the crypto market. 

Consequently, the incidence of liquidations and declines in open interest are less frequent in options trading compared to futures, crypto algorithmic trading firm Auros said.

Implied volatility over a 30-day period for bitcoin options contracts shows the rally has also pushed the value to its highest point since the end of June, at just above 59%, data from T3’s Bitcoin Volatility Index shows.

To put that into context, the index has only crossed over that level five times this year.

Contributing factors

According to Mark Connors, head of research at 3iQ, the recent volatility in the crypto derivatives market can be attributed to a combination of factors. 

“Historically low cold coming into this week and favorable developments in spot BTC events combined to ignite a chase by some market makers to get longer gamma,” Connors said. 

This means that changes in market sentiment occurred more quickly than market makers could adjust their hedges, leading to a shift in open interest across different derivatives vehicles, he said.

Connors emphasized these factors contributed to the surge in BTC price but were not the primary driver behind it.

“We do not think the options positions drove the spike to $35,000, rather they augmented the move somewhat,” he added.

At the same time, BlackRock’s proposed iShares Bitcoin ETF, carrying the ticker IBTC, reappeared on the Depository Trust and Clearing Corporation website after disappearing early on Tuesday.

The initial listing on the Depository website was attributed by analysts as a catalyst for continued bullish fervor surrounding a potential greenlight of a US bitcoin ETF in the year ahead.

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