Recent Skew data shows that Bitcoin’s (BTC) indicated uncertainty took a dip after the halving occurred yesterday. Volatility is at the heart of every skilled trader, as it tracks daily average price variations and offers insight into market conditions.
As Cointelegraph previously mentioned, BTC halving event appears to increase uncertainty because of its major uncertainties. Traders expected the price would either rally or dump during and after the incident. Hence the spike in the short term. The metric has returned to previous rates at the time of publishing.
Uncertainty Can Drive Volatility
For the past few months, analysts have spun the idea that a major drop in the hash rate could occur after halving. Miners will reportedly motivate it by shutting down their ASIC-based operations due to Bitcoin’s block subsidy reduction from the previous 12.5 BTC to 6.25 BTC.
There is still a legitimate concern to date regarding the beginning of a ‘death spiral’. This would cause large miners to sell assets and potentially even bankrupt others who are more leveraged. One potential cause of this breakdown will be the fact that miners’ critical profits have been slashed.
Keep in mind that transaction fees rarely reach 5 percent of miners’ profits, largely composed of this block subsidy incentive. Cutting revenues from the $5 billion mining industry by half will yield wavelengths of unpredictable outcomes like hard forks.
Traders are Dependent on Implied Volatility and the BTC Halving Has Affected the Metric
There are two ways to calculate uncertainty, either by using historical data or evaluating market premiums on existing options. It is important to remember that historical data has a drawback when approaching price-sensitive events because it favors past movements.
After its $3,600 crash on March 12, volatility had been on a continuous decline for Bitcoin. Entering May, Bitcoin implied uncertainty that consolidated at about 80 percent as the BTC halving approached.
Market options present a perfect way of measuring potential price swings as they rely on traders’ skin-in-the-game. The higher premiums demanded by sellers of options reflect an increased fear of volatility coming in.
ATM options, as seen in the chart below, mean that strikes used to measure are at the money, meaning $9,000 for the current Bitcoin (BTC) underlying $8,900 price.
Because of their near absence of an intrinsic value, those are the norm for volatility indexes. A buyer of a (bullish) call option with a strike of $7,000 faces an intrinsic value of $1,900, as Bitcoin trades far above that point.
How Traders Can Interpret an Implied Volatility Drop
Implied volatility to record rates means increased stock option premiums. It can be translated as the insurance market charging higher, and it goes both for (bullish) calls and for puts (bearish) options.
The simple strategy of purchasing an option to call offers cover when the market is up. By paying upfront a premium, one can then buy Bitcoin at a fixed price. The opposite holds for the buyer of the put option, who buys insurance in case of a sudden fall in the market.
One thing to remember is that a volatility shift is neither a bullish nor a bearish measure. Unusually high rates reflect volatility, leading traders to ensure that stop-loss orders are in place and large leverage margins are deposited.
Low Volatility Is Not equal to Reduced Risk
Some traders tend to extrapolate that scenarios of low volatility mean lower risks for unexpected large candles. Rest assured, there are no metrics like this. One can use these periods across option markets to construct insurance positions.
On the other hand, if a trader is caught off guard during a high volatility situation, they will either close all positions to prevent needless stop-loss execution. Or plan for ups and downs that would almost certainly liquidate leveraged traders.