Jan 9, 2024

Following The Volatility Story

Following the Volatility Story: See how crypto markets are trending and how to trade them!

Following The Volatility Story

Following The Volatility Story

With Passage testnet launching soon and mainnet shortly after, the most straightforward volatility trading product in DeFi is about to hit the market. It’s an ideal time to dig into historical volatility conditions, catalysts, and recently observable patterns. Crypto holds a reputation as an extremely unpredictable asset class, but volatility metrics reveal some nuances that are worth exploring for traders.

Zooming Out

Taking a look at the BTC historical volatility chart it’s clear that volatility has cooled off over time as the growing market cap makes wild swings in price less feasible. Especially since 2021, there haven’t been extended periods of heightened volatility. Even when it does spike the movement has been relatively short lived and less pronounced than earlier on in Bitcoin’s history.

Chart selected for 30 day realized volatility (via Amberdata)

This behavior all makes sense given the prolonged bear market, crypto winter, risk off conditions that have prevailed over the past year and a half. The case can be made that until something reignites volume in the markets, any sort of volatility spike will be shortly followed by a reversion to the mean, presenting opportunities to short volatility.

Zooming In On 2023

Thus far into 2023 not much has shifted in terms of volatility conditions. As shown below the Q1 recovery from $16k lows breathed some life into the volatility chart, but it was short lived. The second half of the year has seen extremely muted volatility as spot prices for both BTC & ETH held a tight range throughout June & July. During these 2 months of all time low volatility the short vol trade eventually became crowded, culminating in a single day 10% price drop during mid-August.

30 day RV 2023

Current markets are being stoked by anticipation of Bitcoin ETF news, but delays on the regulatory side are keeping a lid on volatility for now. The coming months will tell whether the volatility mean reversion trend is still in play, or if the pull of impending institutional adoption is enough to buck it.

Potential Catalysts For The Coming Months

The upcoming launch of Passage will take place at an interesting time for volatility speculation, where there are quite a few potential catalysts hanging around but the balance between positives and negatives is keeping prices in place for now. On one hand there’s the potential for ETF approval and the historically bullish BTC halvening that arrives in 2024, but current U.S. regulatory scrutiny on Binance and FTX’s assets being recently approved for liquidation sit in opposition. The ETF decision in particular is a catalyst that could instantly ignite a return to high volatility if approved, but for now markets are still relatively quiet.

Deribit’s DVOL index provides a look at options trader’s volatility outlook for the next 30 days. While implied volatility has been slightly higher during September it would appear the markets aren’t expecting a shift in the volatility regime just yet.

A New Tool For Volatility Trading

When markets are in this sort of limbo directional trading with perps gets tricky, and buying spot becomes a long term accumulation strategy rather than an option for active traders. For low volatility environments like what’s been seen throughout 2023, Passage offers a way to play both the stretches of muted volatility and the occasional news driven spikes. A Stay In Passage is the most straightforward way to take on a short volatility position, which has become the base case for traders in the current market climate as any spikes in implied volatility are swiftly driven back down. With the handful of potential catalysts currently on the table, Breakout Passages can be used to long volatility and play market reactions to news on the ETF front, FTX liquidations, or other regulatory circumstances.