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.

Aug 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%.

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.

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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