Crypto Volatility Updates
For the past few weeks, major crypto assets have been on a downward spiral with only minor recoveries on a few altcoins. Have we gotten to the “bear market” that is ever so often mentioned whenever there is a significant market selloff? Is this the year where crypto assets follow the efficient market theories by returning to a “true” equilibrium? How do we define true market equilibrium?
Maybe these are the wrong questions to ask, and instead, investors should focus on having a balanced, diversified portfolio while utilizing hedging strategies for risk management. Bitcoin has seen a tremendous slump in its hash rates due to the ongoing political instability in Kazakhstan (a country known for Bitcoin mining, amongst other things). With $6 billion in BTC options expiring at the end of 2021, there was an adequate balance of optimism and pessimism that led to a much tempered year-end. Also, with the CVI hovering around the 78 range, we can interpret expectations of future volatility to be minimal given the high correlation between BTC & ETH option prices with the CVI. It does appear there is some light at the end of the tunnel; however, investors need to ensure a proper balance of crypto assets to limit any short-term price impacts.
This week’s takeaways:
-The last time we reached this lower range of implied volatility was in April 2021, right before the market selloff from China’s ban on crypto.
-There are some signs that mid-term implied volatility will remain around the 75–80 range.
The first week of 2022 was filled with lots of market activity. While crypto gained new grounds in supporting much needed transactions in Turkey and Venezuela, there were some concerns over Bitcoin mining in Kazakhstan after the government shutdown of internet access for residents. Bitcoin has seen a significant selloff given uncertainty from Kazakhstan and also from its correlation with technology stocks that have been on a downward spiral over the past few weeks. Ethereum has also seen a significant selloff much higher than Bitcoin; down -22% for the month compared to -15% for Bitcoin.
There is an ongoing sentiment that most of these movements are a result of the U.S. Federal Reserve’s hawkish tone on inflation. While this correlation is yet to be adequately confirmed as it pertains to crypto markets, it appears most investors are more anxious about the future and this is leading to a lot more outflows from these assets. From a mid-term perspective, it does appear that there is a much more positive sentiment as measured by the CVI.
Looking through the CVI Index, we observe that the last time implied volatility hovered around the 75 range was in April 2021, right before the huge selloff due to China’s ban on crypto.
Pending any black swan events, it appears the CVI will be hovering around the 75–100 range in the short/mid-term and this should give investors an idea of what assets make the most sense for their portfolio. BTC’s dominance remains at 40%, so altcoins will continue to have some correlation with BTC’s future perceived value/volatility.
Looking at the ETHVI index, which measures the 30-day implied volatility of Ethereum, there was a sharp run-up of implied volatility on January 5th, 2022, before dropping to the 85 range where it has remained.
There is no doubt that investors will continue to talk about a “bear” market, but we encourage them to use the CVI & ETHVI as a gauge of the market’s sentiment for future volatility. There has been a significant drop in market perception of volatility over the past few weeks which could lead to the conclusion that the future is a lot more positive than the present.
A few things that have happened this week
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