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Bitcoin: Yield-seeking funds behind ‘crushed’ volatility?

For those who expected Bitcoin’s price to surge exponentially any minute, the month of July has been disappointing. Since 1 July, Bitcoin‘s price hasn’t gained or lost by much on the charts, with the cryptocurrency continuing to trade within a tight price band. This is perhaps the best evidence of the low volatility in the market. However, that’s not all.

According to the data provided by Skew, the BTC Implied Volatility v. Realized volatility chart has sunk as well, sunk to levels unseen since March 2020.

Source: Skew

While the Realized Volatility dipped to 3.2% on 10 July, the Implied volatility remained firm at 3.5%. Looking at the chart above, it can be observed that the IV had been moving sideways over a couple of weeks, with traders not expecting an immediate trend reversal in the Bitcoin market.

However, according to one of the Managing Partners at Blockhead Capital, Matt David Kaye, the reason for this suppressed volatility may be the flood of yield-seeking funds with short volatility options in the market. These have been advertised as low-risk, yield generating vehicles to many investors in the market.

As the price of Bitcoin consolidated, market makers were trying to hedge their risk by ever-adjusting their spot exposure. This resulted in the creation of a tighter spread and by extension, predictable price ranges for June as they bought back BTC at low prices and sold BTC when the price rose even a little. Thus, these short-volatility funds were gaining pennies, with Kaye adding that the risk was mispriced in the Bitcoin Options market.

The crypto-market, apart from a short period in March, has painted a mildly volatile picture since the beginning of the year. In fact, data provided by @ThinkingUSD revealed that the annualized historical volatility for BitMEX’s .BXBT index, according to the 30 minute Time Weighted Average Price [TWAP], was down by over 66% YTD in June. This value means that even though the market expected a bull run, the price of Bitcoin was unlikely to fluctuate like it did in Q4 2017 and Q1 2018.

However, this also gives an excellent opportunity to accumulate volatility, as when the market breaks out, it could result in larger profits. The only way now for the price to pick up is to have the spot market volume note a boost too.

At press time, Bitcoin was trading at a price of $9,220, with a 24-hour trading volume of $14.8 billion.

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