- Bitcoin’s Deribit Implied Volatility Index (DVOL) escalated from an annualized 36% to 48.5%.
- Major exchanges such as OKX, Deribit, and Bybit saw a funding rate crash of more than -10% in annualized terms.
Decoding the Dynamics of Bitcoin Perpetuals
Late Thursday witnessed a dramatic plunge in the funding rates of bitcoin’s perpetual futures as the cryptocurrency’s price took an unexpected dip. This sudden move endangered the widely used strategy of shorting volatility, casting shadows over its continued feasibility.
For those unfamiliar, perpetuals are essentially futures contracts devoid of an expiration date. They come with an intrinsic funding rate mechanism that aids in aligning the prices of these perpetuals with the corresponding index price. Here’s the crux: a negative funding rate typically reveals an overarching pessimism in the market, indicating that those betting on falling prices (shorts) are paying their counterparts (longs) to maintain their position. Conversely, a positive rate paints a bullish sentiment.
Three prominent exchanges – OKX, Deribit, and Bybit – recorded a dramatic descent in their funding rates, sinking to -10% or even lower. This coincided with bitcoin’s average price dropping sharply to a concerning $25,392, as per Velo’s data. Further illustrating the volatile landscape, the Deribit Implied Volatility Index (DVOL), which measures expected price fluctuations over a span of 30 days, underwent a significant hike.
Hedging Against the Unexpected
A plausible theory to explain this chaos is that traders who had been shorting options, aiming to benefit from a persistent low volatility, may have resorted to selling their perpetual futures. This tactic would serve as a defense mechanism against unexpected volatility surges, effectively deepening the price decline.
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Griffin Ardern, a seasoned volatility trader at Blofin, a renowned crypto asset management firm, weighed in on the situation. Ardern noted the extensive shorting of put options by BTC option sellers, driven by a previously bullish market sentiment. The sudden price downturn triggered a protective hedging behavior, exacerbating the decline.
Deribit’s Dominance & Its Strategic Shift
A key player in this narrative is Deribit, an exchange that boasts control over nearly 90% of the crypto options market. This means that the overwhelming majority of volatility shorting witnessed in the recent past transpired on Deribit. The exchange’s BTC perpetual futures even reached a staggering discount of $2,000 relative to the average cryptocurrency spot price on various platforms.
Addressing these developments, Lukk Strijers, Deribit’s Chief Commercial Officer, revealed a recent change in the platform’s liquidation strategy. Aimed at enhanced efficacy, the revised approach zeroes in on liquidating the very instrument causing the disruption.
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