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

The bitcoin derivatives market is beginning to show heightened volatility and interest from participants seeking to take advantage of the week’s major price moves

article-image

Sodel Vladyslav/Shutterstock, modified by Blockworks

share

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.


Don’t miss the next big story – join our free daily newsletter.

Tags

Upcoming Events

Hilton Metropole | 225 Edgware Rd, London

Mon - Wed, March 18 - 20, 2024

Crypto’s premier institutional conference returns to London in March 2024. The DAS: London Experience: Attend expert-led panel discussions and fireside chats Hear the latest developments regarding the crypto and digital asset regulatory environment directly from policymakers and experts.

Salt Lake City, UT

WED - FRI, OCTOBER 9 - 11, 2024

Pack your bags, anon — we’re heading west! Join us in the beautiful Salt Lake City for the third installment of Permissionless. Come for the alpha, stay for the fresh air. Permissionless III promises unforgettable panels, killer networking opportunities, and mountains […]

recent research

Research report - cover graphics (1).jpg

Research

In this report, we dive into crypto private market data to gather insights on where the future of the industry is headed. Despite a notable downturn in private raises, capital continues to infuse promising projects that aim to transform payments, banking, consumer experiences, community, and more, with 2023 being the fourth-largest year for crypto venture capital.

article-image

BUZZ holds shares of Coinbase, Robinhood and MicroStrategy

article-image

Opinion: Even though I didn’t pay for my “Diamond Hands” burger with BTC, don’t let that fool you into thinking that crypto’s development is futile

article-image

The results mark “a major positive inflection point,” one analyst says, as the exchange carries net income momentum into a crypto rally

article-image

While the slate of 10 US spot bitcoin funds have tallied $4.6 billion of net inflows thus far, half of the field is lagging the leaders

article-image

Trading volumes totalled $154 billion in Q4, including $125 billion in institutional volume

article-image

DeFi on Bitcoin is all the rage right now and Stacks is positioned to benefit