The decision by crypto-friendly bank Silvergate to wind down operations amid the worsening macroeconomic picture has fueled digital-asset investor anxiety, spurring demand for derivatives that offer protection against price slides in major tokens.
At press time the 30-day bitcoin skew, derived by looking at the difference in implied volatility/demand for cheap out-of-the-money (OTM) calls and OTM put options expiring in four weeks, shows the strongest bias for bearish put options in over two months.
That's a sign investors are worried about a deeper slide in the bitcoin price and are buying put options to hedge their long spot or futures positions, or are simply looking to profit from potential bearish price action.
"BTC 25d skews are firmly back to puts > calls in shorter dates as it feels upside momentum has been sucked out of the market," Paradigm, an institutional liquidity network for crypto derivatives traders, said in a market update early Thursday.
A call option gives the purchaser the right but not the obligation to buy the underlying asset at a predetermined price on or before a specific date. A put option gives the right to sell. A long position is one in which an investor owns the asset.
The renewed bias for put options appears justified, considering the market depth for U.S. dollar trading pairs has deteriorated amid the bitcoin price slide. That means a small sell order can lead to an outsized price drop. Depth refers to the ability of the market to absorb large buy and sell orders at stable prices.
"USD market depth has dropped almost as much as BUSD's in the past month. After the BUSD news, liquidity for its top pairs dropped more than 40% before recovering. Meanwhile, the Silvergate news is weighing on USD pairs," Paris-based crypto data provider Kaiko tweeted.
Bitcoin has slipped to three-week lows under $21,000 in the past 24 hours, extending the decline from the highs above $25,000 reached last month.
The sell-off could be attributed to the crisis at Silvergate and the resulting fears of liquidity drain, the sharp hawkish repricing of Federal Reserve interest-rate expectations and operational bottlenecks at major exchanges.
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The 30-day bitcoin skew has dropped to -3.62, the lowest since Jan. 7, a chart provided by Amberdata shows. The 60- and 90-day metrics slipped to two-month lows of -2.72 and -1.58%, respectively.
A similar pattern is observed in options tied to ether, the second-largest cryptocurrency by market value, despite the hype around Ethereum's impending Shanghai upgrade.
"Paradigm flows have been dominated by puts in both BTC and ETH. Skew favors Puts>Calls out to 90-days for BTC and out to 180 days for ETH," Paradigm said on its Telegram channel.
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