Bitcoin's Implied Volatility Falls Sharply Ahead of Jerome Powell Speech

Bitcoin’s options market foresees little price turbulence in the short-term, even as markets await a key speech from the chairman of the Federal Reserve.

AccessTimeIconAug 27, 2020 at 12:01 p.m. UTC
Updated Sep 14, 2021 at 9:48 a.m. UTC

Bitcoin’s options market foresees little price turbulence in the short-term, even as central bank watchers expect fireworks during a speech by the chairman of the Federal Reserve on Thursday morning.

  • Bitcoin's implied volatility on one-month options, a gauge of the market's expectations for price gyrations over the four week period, fell to 52% early Thursday – the lowest level since July 25, according to data source Skew
  • Short-term price expectations have declined sharply from 70% to 52% over the past two weeks.
  • Over three months, the gauge has pulled back from 80% to 68%, while the six-month line has declined from 80% to 72%.
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Implied bitcoin volatility

  • At 9 a.m. Eastern today, Federal Reserve Chair Jerome Powell is expected to announce new measures from the central bank at his annual keynote at the Jackson Hole symposium.
  • Investors usually buy both calls (bullish bets) and puts (bearish bets) ahead of such key events, pushing implied volatility higher.
  • Analysts expect Powell to signal tolerance for high inflation – a move that could weaken the U.S. dollar and propel bitcoin higher.
  • However, with strong expectations already built in, the scope for disappointment is high, and the dollar may surge if Powell’s comments fall short of expectations.
  • The event, therefore, has potential to trigger big moves in either direction.
  • The lull in expectations for bitcoin price volatility may reflect that traders are playing a wait-and-see game until Powell's planned direction becomes clear.
  • That said, any potential volatility in the forex markets could feed into cryptocurrencies, as the inverse correlation between bitcoin and U.S. dollar has strengthened over the past few weeks.
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Bitcoin and dollar index (DXY) correlation

  • The 60-day inverse correlation is now strongest in at least 16 months.
  • Further, the implied volatility terms structure remains steep, meaning the six-month implied volatility is still hovering above the three-month, which in turn is greater than the one-month metric.
  • That "indicates that uncertainty is high," Denis Vinokourov, head of research at the London-based institutional brokerage BeQuant, told CoinDesk in a Telegram chat.
  • At press time, bitcoin is trading near $11,380, representing a 0.8% decline on the day.

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