Bitcoin's 30-Day Volatility Slips to 17-Month Low

Market makers from DeFi option vaults are perhaps the invisible force helping create a boundary for prices.

Apr 20, 2022 at 9:37 a.m. UTC
Updated Apr 20, 2022 at 6:45 p.m. UTC

Omkar Godbole is the senior reporter on CoinDesk's Markets team.

There is a calm in the bitcoin (BTC) market, the likes of which we last saw before the beginning of the late 2020 bull run.

The leading cryptocurrency's 30-day volatility, which measures the standard deviation of daily returns over four weeks, has declined to 2.2%, the lowest since November 5, 2020, according to data provided by Arcane Research.

The gauge peaked above 6% in June 2021 and has been on a declining trend ever since, barring the temporary spike to 4.5% around the March Federal Reserve meeting.

The steady decline could be attributed to several factors, including dominant crypto exchanges Binance and FTX's decision to cut down leverage, declining interest in crypto-margined futures and, more recently, reduced speculative interest, as evidenced by the decline in trading volumes.

Data tracked by Kaiko Research shows that bitcoin and ether's (ETH) weekly trading volumes have slipped to the lowest levels since the summer of 2021.

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Weekly bitcoin and ether volumes (Kaiko Research)

"Both bitcoin and [ether] trade volumes have declined significantly since December, as investors de-risked their portfolios amid growing macro uncertainty," Kaiko Research's weekly newsletter published on Monday said. "The trend accelerated in early April with BTC and ETH weekly trade volume down by over 30% to $7 billion and $5 billion, respectively, relative to the end of March."

While bitcoin is down 10% on a year-to-date basis, ether has lost about 15%, per charting platform TradingView.

The invisible force

There are technical factors at play, too, helping bring tranquility to the bitcoin market.

Market makers, who buy the out-of-the-money call and put options auctioned by decentralized option vaults (DOV) every Friday, hedge their bullish/bearish exposure through opposite positions in the futures and perpetual futures market, according to Two Prime, a digital-asset fund manager. In the process these market makers create a boundary for prices within each expiration cycle.

Market makers are individuals or entities with a contractual obligation to maintain a healthy level of liquidity on an exchange. They make sure there is enough depth in the order book by offering to buy or sell an asset, futures contract or a call or put option at any given point in time. These entities always take the opposite side of investors' trades and maintain a market-neutral book by buying and selling the underlying asset as the price swings.

The DOVs have grown exponentially since the second half of 2021 and now add over $100 million of notional exposure to the market each week. In other words, the sensitivity of market makers' books to directional moves is increasing. As such, their hedging activity could be helping arrest wild price swings in the market.

"Holding larger open interest requires larger hedging activity. This acts as a natural price floor or ceiling for spot prices at short strikes [levels at which DOVs sold options]," Two Prime said in a DOV explainer note published on April 8. "By holding these options to expiration, as DOVs do, the gamma of the underlying option increases, thus requiring more delta hedging from market-makers, further intensifying this price floor and ceiling dynamic."

Calm before the storm?

A prolonged period of low price turbulence often ends with violent price action on either side.

For instance, the previous low volatility regime lasted for over two months, from late September to early November, with the cryptocurrency trading mainly in the range of $10,000 to $13,000. The breakout happened on Nov. 5, with prices rallying well above the June 2019 high of $13,800.

Whether history will repeat itself is anybody's guess. That said, there are signs a big move could happen soon.

"The seven-day volatility has climbed above the 30-day volatility, which could suggest that the market is waking up," Arcane Research's weekly newsletter published on Tuesday said.

Bitcoin was last seen trading near $41,500, representing a 2% gain on a 24-hour basis, according to CoinDesk data.

UPDATE (April 13 14:40): Fixes a typo in the first paragraph.

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Omkar Godbole is the senior reporter on CoinDesk's Markets team.

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Omkar Godbole is the senior reporter on CoinDesk's Markets team.

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