Understanding Bitcoin’s Recent Volatility: April Summary

Bitcoin’s price movement is notoriously volatile, and April 2023 was no exception. This month highlighted significant fluctuations in Bitcoin’s realized volatility, a measure that quantifies the day-to-day variability in prices. Unlike implied volatility, which reflects market expectations, realized volatility provides a retrospective analysis of price movements. By examining swings in this metric, traders and analysts can glean critical insights into market dynamics, evaluate option pricing, and identify shifting trends.

Significant Volatility Spikes

April began with a dramatic spike in Bitcoin’s one-week realized volatility, which reached an impressive 94% on April 12. This marked the highest volatility since January 10, 2023, coinciding with a notable intraday price drop of $3,124, bringing Bitcoin to a low of $82,747 before it concluded the day at $85,270. In the days following this peak, realized volatility experienced a significant reduction, dropping to just 16% by April 20 as Bitcoin settled near the $85,000 mark. This marked one of the quickest contractions in volatility, raising questions about the underlying factors influencing such rapid market changes.

Market Dynamics and Options Activity

Activity surged on April 23 when Bitcoin’s price shot up by $2,785, closing at $93,715. In tandem, one-week realized volatility rebounded to 54%. Notably, data from Greeks.live indicated a substantial increase in open interest for $95,000 call options on Deribit, which swelled from 3,920 to 13,000 contracts. This also represented an additional $160 million in notional, marking the most significant single-day increase since the launch of spot ETFs in January. The falling put-call ratio, which settled at 0.41, revealed a market eager to capitalize on ascending prices rather than hedging against potential declines.

Easing Volatility Trends

Throughout late April, the broader trends showed a gradual easing of realized volatility over two weeks: beginning with 71% on April 12, then ticking down to 59% by April 20, and ultimately landing at 40% by April 30. Notably, while one- and three-month realized volatility levels held steady at around 56%, the six-month mark settled at 54%. This trend highlights a market scenario where short-term price swings calm rapidly, yet traders maintain a cautious outlook for medium- to long-term movements, expecting continued volatility given the broader economic environment.

Options Strategies and Market Maker Dynamics

Complexities arise for market makers operating under these conditions. For instance, with a 16% short leg against approximately 55% one-month implied volatility, dealers are capturing around 0.8 volatility points of theta daily. With realized volatility this subdued, gamma risk remains minimal, allowing market makers to hedge by selling Bitcoin into rallies. Consequently, any upside momentum seems to stall unless prompted by significant new catalysts, much like the brief spike in activity witnessed on April 23 due to ETF creations.

The Carry Trade Phenomenon

In the concluding week of April, Bitcoin exhibited characteristics of a carry trade. Between April 25 and April 30, the average intraday range shrunk to about $1,900, and realized volatility stabilized at 16%. Meanwhile, the one-month implied volatility averaged around 55%. Binance funding rates fell considerably from 0.039% on April 12 to an average of 0.0066% over eight-hour intervals. Additionally, liquidations plummeted from $485 million on April 12 to only $78 million by the end of April, signaling a more stable market environment.

Future Outlook

With six-month realized volatility stable at 54%, comparable to levels seen on January 1, the market seems poised for further turbulence, especially as significant upcoming events like the Federal Reserve’s summer meetings and the U.S. election loom. April served as a case study of a market willing to trend higher, supported by steady ETF demand, but equally quick to retract as momentum diminishes. The observed volatility spikes, though fleeting, underscore the necessity for caution. As long as short-term volatility remains compressed around 15%, a reset may occur, leading to sharper price adjustments driven by the next significant market impulse.

In conclusion, Bitcoin’s April volatility curves depict a market that is both reactive and susceptible to external pressures, with implications for traders, investors, and analysts alike. Understanding these dynamics is crucial for navigating the intricate landscape of cryptocurrency trading and investment.