Investors are expecting more volatility in ether (ETH) compared with bitcoin (BTC), according to a key metric, with the measure of risk at a six-month high amid a boom in decentralized finance (DeFi).
- The metric, which tracks the difference in implied volatility for at-the-money options in both cryptocurrencies, has risen from -2.4% to 29% in two months.
- Implied volatility is calculated from options prices and shows the market's opinion of the underlying asset’s potential moves. It is often considered a proxy of market risk.
'Potential big move' - but not necessarily up
- The surge in the volatility spread suggests investors are pricing bigger percentage moves in ether than bitcoin over the next quarter.
- “Investors are focused on DeFi and mindful of a potential big move in ETH," said Skew's CEO Emmanuel Goh.
- Implied volatility does not tell us anything about the direction of the next big move.
- As such, traders are warned against interpreting the rise in ether-bitcoin volatility spread as a bullish price signal.
- Ether has witnessed greater price volatility over the past four weeks. The three-month ether-bitcoin realized volatility spread bottomed out at 5.7% on July 20 and was last seen at 19%, the highest level since June 11.
- Realized or historical price volatility is a measure of daily price movements that have already happened. Implied volatility is what the market expects for the future.
- Bitcoin’s price is up 64% on a year-to-date basis, while ether has gained over 200%, according to data source CoinDesk 20.
- The total value locked in DeFi platforms is now closing on the $7 billion mark – up 10% on a year-to-date basis, as per data provided by defipulse.com. Most decentralized applications are based on ethereum’s blockchain.
- Ether’s average transaction costs reached record highs above $6 earlier this month, signaling network congestion.
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