Cryptocurrency prices have always been roller coasters, and some rides are scarier than others. However, there may not be much difference in price volatility between the top two coins in the coming months, a key metric indicates.
The spread between the three-month at-the-money implied volatility for ether (ETH) and bitcoin (BTC), a measure of expected relative volatility between the two, declined to 8.9 percent Friday, according to the crypto derivatives research firm Skew. It was the lowest level since Dec. 5.
Implied volatility is the market’s expectation of how risky or volatile an asset would be over a specific period. It is computed using the prices of an option and the underlying asset and other inputs such as time to expiration.
The compression of this spread implies that cryptocurrencies’ fortunes are tied more strongly than before to each other. But the force driving them together could be the turmoil in the mainstream financial markets, due to the economic fallout from the coronavirus pandemic.
“The market is macro-driven and does not expect a lot of ‘dispersion’ between the different coins and anticipates a convergence of ether and bitcoin price volatility,” said Emmanuel Goh, CEO of Skew.
Volatility essentially represents uncertainty and has a positive impact on option prices. The higher the uncertainty, the stronger the hedging demand is for both call (bullish bet) and put (bearish bet) options.
However, it does not tell us anything about the direction of the next move. High implied volatility simply means the underlying asset has the potential for big price swings in either direction.
The ether-bitcoin implied volatility differential topped out at a record high of 33 percent on Feb. 22 and has been falling ever since.
“Option-implied volatilities are driven by the net buying pressure for options and…