Last week at this time, Bitcoin appeared to be close to staging a significant short-term bullish breakout. According to market capitalization, the biggest cryptocurrency in the world had formed a bullish short-term ascending triangle pattern and appeared ready to break above the crucial $25,200–400 region, paving the way for a quick ascent higher toward the next significant area of resistance around $28,000.
As events unfolded, a confluence of global headwinds (a month of solid US data and hawkish Fed talk that drove US rates and the currency higher and US stocks lower) as well as US regulatory fears amid a growing crypto crackdown kept the bulls at bay. Last week, the price of bitcoin decreased by almost 3.0%, and this week, it has already decreased by more than 1.5%.
Bitcoin is currently trading in the low $23,000s, roughly in the middle of its February price range of $21,400-$25,300. And it appears that traders and investors are betting that there will remain rangebound circumstances for a while. At least, that is the message being conveyed by the Bitcoin option markets.
Deribit's Bitcoin Volatility Index (DVOL), according to data provided by The Block, has fallen significantly over the past week. This appears to be a direct result of Bitcoin's most recent failure to break above $25,000, which would have likely resulted in significant (most likely bullish) near-term volatility. In the past week, the DVOL dropped from 60 to 50. Just before the 2023 cryptocurrency surge really got rolling, it printed a record low of 42 in January, which is not far above the current price.
At-The-Money (ATM) option pricing likewise shows a dramatic decline in implied volatility, with short-term volatility expectations suffering the biggest decline. The Block's data indicates that Bitcoin's 7-day Implied Volatility recently stood at 44.55%, a decrease from 60.33% at same time last week. Although significantly lower than this time last week, the 30, 60, and 180-Day Implied Volatilities are at 47%, 50%, and 53.5%, respectively, down from 57%, 58%, and 58%.
The picture is ambiguous in terms of what the options markets are suggesting about the prospects for bitcoin. On the one hand, the ratio of generally bullish Call options to normally bearish Put options with open interest is virtually entirely in their favor. The Open Interest Put/Call Ratio, according to information provided by The Block, was last at 0.42, just slightly higher than the record lows it reached earlier this month at 0.39.
The Bitcoin 25% Delta Skew, on the other hand, is all near to zero for options with expirations in 7, 30, 60, 90, and 180 days, suggesting no positional bias. A often watched indicator for how much trading desks are overcharging or undercharging for upside or downside protection through the put and call options they are selling to investors is the 25% delta options skew.
The right to sell an asset at a certain price is provided by a put option, and the right to purchase an asset at a predetermined price is provided by a call option. A 25% delta options skew above zero indicates that desks are charging more for call options than puts of equal value. This might be viewed as a bullish indicator since investors are more keen to acquire protection against (or to bet on) a rise in prices. It also suggests that there is a stronger demand for calls than puts.