Bitcoin Price Holds Steady as Data Suggests End of Volatility Spike

In the past few months, Bitcoin traders had grown accustomed to lower levels of volatility, but historically, it’s not uncommon for the cryptocurrency to see price swings of 10% in just two or three days. The recent 11.4% correction from $29,340 to $25,980 between Aug. 15 and Aug. 18 took many by surprise and led to the largest liquidation since the FTX collapse in November 2022. But the question remains: Was this correction significant in terms of the market structure?

Some experts point to reduced liquidity as the reason for the recent spikes in volatility, but is this really the case?

As indicated by the Kaiko Data chart, the decline of 2% in the Bitcoin (BTC)order book depth mirrors the decrease in volatility. It’s possible that market makers adjusted their algorithms to align with the prevailing market conditions.

Hence, delving into the derivatives market to assess the impact of the drop to $26,000 is prudent. This examination aims to determine whether whales and market makers have become bearish or if they’re demanding higher premiums for protective hedge positions.

To begin, traders should look to similar instances in the recent past, and two events stand out:

The first decline took place from March 8 to March 10, causing Bitcoin to plummet by 11.4% to $19,600, marking its lowest point in over seven weeks at that time. This correction followed the liquidation of Silvergate Bank, a crucial operational partner for multiple crypto firms.

The subsequent significant move occurred between April 19 and April 21, resulting in a 10.4% drop in Bitcoin’s price. It revisited the $27,250 level for the first time in more than three weeks after Gary Gensler, the chair of the United States Securities and Exchange Commission, addressed the House Financial Services Committee. Gensler’s statements provided little reassurance that the agency’s enforcement-driven regulatory efforts would cease.

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Not every 10% Bitcoin price crash is the same

When it comes to Bitcoin quarterly futures, they often trade with a slight premium when compared to spot markets. This is because sellers usually require additional compensation for the delayed settlement. In healthy markets, the annualized premium is usually between 5 and 10%, which is known as “contango”.

Prior to the crash on March 8, the futures premium for Bitcoin was at 3.5%, indicating a moderate level of comfort. But when Bitcoin’s price fell below $20,000, a sense of pessimism was felt, causing the indicator to shift to a discount of 3.5%, which is a typical sign of a bear market.

The correction on April 19 had little effect on Bitcoin’s futures main metric, with the premium remaining around 3.5% as the BTC price revisited $27,250. This could mean that professional traders were either confident in the market structure or were ready for the 10.4% correction.

The 11.4% BTC crash between Aug. 15 and Aug. 18, is different from previous cases. The starting point for Bitcoin’s futures premium was higher, surpassing the 5% neutral threshold. But the derivatives market quickly absorbed the shock on Aug. 18, and the BTC futures premium returned to a 6% neutral-to-bullish position. This suggests that the decline to $26,000 did not significantly dent the optimism of whales and market makers regarding the crypto.

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Options markets confirm lack of bearish momentum

To understand if the recent crypto bear market has made pro traders more risk-averse, traders should analyze options markets. If traders expect a Bitcoin price drop, the delta skew metric will rise above 7%, while phases of excitement tend to have a -7% skew.

Data shows that before the Aug. 15 crash, there was excessive demand for call (buy) BTC options, with the indicator at -11%. This trend changed during the following five days, yet the metric stayed within the neutral range and was unable to reach the 7% threshold.

In conclusion, both Bitcoin options and futures metrics don’t show any signs of professional traders adopting a bearish stance. This doesn’t guarantee that BTC will soon return to the $29,000 support level, but it does reduce the likelihood of an extended price correction.