As crypto-asset markets continue to recover, one observer said, “Short-term implied volatility in excess of long-term implied volatility signals the possibility of a market reversal.”
Bitcoin’s rapid recovery from the lowest level of the last month caused bullish expectations in investors. Data provided by derivatives research firm Skew shows Bitcoin’s implied one-week volatility rose to 75% year-on-year on Thursday, surpassing one-, three-, and six-month benchmarks. Robbie Liu, a researcher at crypto financial services provider Babel Finance, told CoinDesk that “Bitcoin’s short-term implied volatility exceeds the long-term implied volatility, signaling the possibility of a market reversal.” He also added that a similar trend was observed following the May 2021 crash.
The metric that expresses expectations for price turbulence, though forward-looking, says nothing about the direction of upcoming price volatility. A burst in implied volatility is taken to represent uncertainty, and an inverted structure in which short-term implied volatility is greater than long-term indicators indicates panic. In the past, the inverted structure formed a price bottom.
One-week implied volatility last surpassed long-term indicators on Jan. 24, when Bitcoin slumped to a six-month low below $33,000. Then, Bitcoin managed to climb above $45,000 earlier this month. Bitcoin’s early December sales were exhausted as the one-week indicator climbed well above the six-month metric. Bitcoin’s late September 2021 and May-June 2021 lows coincided with short-term volatility expectations that signaled panic.
If the metric repeats the past, Bitcoin could start to recover from Thursday’s low of $34,500. However, Liu warned investors that the move “doesn’t mean that there may only be a short-term recovery and that BTC will not fall below $34,000 in the medium-term.”
Bitcoin, which has risen 10% in the last 24 hours, is trading at $ 38,863 as of broadcast time.
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