Volatility Ticks Up, Are Good Times Ahead?


In the June 15th Crypto Trader Digest, I presented a time series analysis of 30 day realised Bitcoin volatility since 2010. I defined a low volatility phase, as a period of time when the 30 day volatility was below 45% annualised. 2015’s low volatility phase began in the middle of April, and reached it’s nadir June 13th at 19.08%. Current 30 day volatility stands at 31.95%, a 67% increase. September is only 2 months away. Using past trading behaviour as a guide, price action will increase to take us out of the low volatility phase by early fall.

Since the $150-$170 crash in January, Bitcoin has local bottomed in the $210-$220 range on 4 separate occasions. Sub $200 Bitcoin while anticipated by many bears, might just never come to pass again. After 18 months of winter, a volatility median reversion to 74% is more likely to lead to substantially higher prices. The $300 upside resistance level, could fall quicker than many expect and unleash a wave of FOMO buying across the crypto-currency complex.

Bitcoin Volatility Compression

The last few months have been very frustrating for traders. The relentless decline in price volatility has almost transformed Bitcoin into a regular currency. The charts above show the realised 30 day volatility for XBTUSD (Bitcoin), EURUSD, and USDJPY. EURUSD and USDJPY are two of the most traded currencies globally. They are the most “mature” currency pairs one can trade.

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The Volatility Ratio is constructed by dividing the 30d realised volatility of Bitcoin by the average of the EURUSD and USDJPY 30d realised volatilities. During the price collapse at the beginning of the year, the ratio reached its highest value of 14.53x. Currently Bitcoin volatility has compressed significantly and the ratio now stands at 1.89x.

Has Bitcoin crossed the chasm from a pure speculative magic internet currency to a “stable” currency? No. Bitcoin still lacks many of the facets of global major currency. Local currency debt market? No. Liquid spot and derivatives market? No. Used in every day transactions? No. Volatility will return in a large way, because Bitcoin is still a very speculative currency, commodity, or store of value (take your pick). This lull in trading activity and volatility presents an great opportunity for traders establishing long positions.

Bitcoin is a long dated call option. It will either by worth nothing, or a lot. An option is most valuable when the volatility of the underlying asset is the highest. Bitcoin volatility has taken a nose dive, and so has the price. For long term terms (5 year trade horizon, and can stomach a >50% mark to market loss), the current price to volatility situation presents an optimal buying opportunity. Timing the bottom is a fools errand, if you have a long term vision whether you buy and the price drops 20% or more is irrelevant. You are gunning for a 5x, 10x, or beyond return. With that in mind, accumulating long dated futures contracts is a prudent strategy.

As Bitcoin volatility normalises, USD swap rates will begin rising. With higher volatility, speculators will re-enter the market and push USD swap rates higher. The risk / reward for leveraged longs is always better than leveraged shorts. USD to Bitcoin rate differential will widen, and longer dated futures contracts will become more expensive. The BitMEX 25 December 2015 Bitcoin / USD futures contract, XBUZ15, trades at a minimum premium to spot. Long term traders who want to take advantage of the low volatility and price should buy this futures contract.

BVOL24H: Earn The Volatility Premium

Over a month ago, BitMEX launched the world’s first daily Bitcoin volatility futures contract BVOL24H. BVOL24H allows speculation on the daily historical volatility by observing the log price move between prices at 5 minute intervals on Bitfinex. Trading this contract allows traders to profit on their view on the intensity of price movements in a 24 hour period.

The daily volatility is very volatile itself. A sudden flurry of trading activity causes the price of BVOL24H to spike. Because upside gains can be enormous, buying volatility is a popular strategy with speculators. However, for a trade to happen someone needs to sell that volatility. Faced with unlimited downside and limited upside, sellers of BVOL24H will demand a time value premium over the expected future volatility. Each 5 minutes, more observations are known and there is less uncertainty about where BVOL24H will settle. As a result, BVOL24H sellers get bolder as the day progresses.

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The graph above shows the premium of the daily BVOL24H VWAP (volume weighted average price) over the settlement value. Here are the relevant statistics:

Mean: 18.13%
Median: 12.72%
Standard Deviation: 39.55%
Max: 144.18%
Min: -44.52%
Observations: 22

To purchase their volatility lottery ticket, buyers are paying 18.13% on average. Sellers are doing a good job as their max drawdown or loss was “only” 44.52% vs. a max gain of 144.18%. Looking at the data so far, traders should feel more comfortable selling BVOL24H as buyers are willing to pay a high price for long volatility.

Yo-Yo Squeeze Or Core Meltdown, Either Way Buy BVOL7D

The bear raid was on in full force yesterday. Bitcoin fell over 5% from $230 to $220 over a few hours. Shorts were licking their chops and the number of Bitcoin swaps outstanding jumped over 20%. Rates went skyward, reaching over 0.10% per day at one point yesterday.

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The chart above shows the jump in XBT swaps outstanding on Bitfinex. Bears borrow XBT and then sell it on the spot book. Any with XBT can lend at a rate to the bears. The $212-$225 kill zone for margin longs has been well documented. Bearish traders are hoping to trip a wave of margin calls, causing the price to plummet towards $200.

The market was here before a month prior. The price stalled in the $220-$222 range, and then made a run at $210. The bears will attempt another raid, but the longer the price stays above $220 the more skittish shorts will become. Faced with an unlimited upside shorts race to cover at the first sign of a rebound.

The best way to play the current limbo in price is to go long weekly volatility. BVOL7D expires each Friday based on the past 7 days price volatility on Bitfinex. The price will yo-yo $220 -> $210 -> $225, or will melt straight to the sub-$200 core. Regardless of which way it goes, being long volatility will be a profitable trade.

Crypto Trader Daily – 17 March 2015

Price Action

Where did all the traders go? Today was a very quiet trading session. The price oscillated between $289 and $292 on very low volume. Volatility in general has taken a nose dive with the .BVOL Index (30 day realised volatility) down over 50% since one month prior to 65%.


Trade Ideas

Going into the final stretch of March, volatility could pop meaningfully if $300 is breached on heavy volume. Consider buying BVOLH15 which expires on March 27th.


In the News

Cryptowatch adds BitMEX to its charting website (Cryptowat.ch)

Coinbase compliance chief resigns (Qntra)

Rakuten starts accepting Bitcoin (WSJ)

Silk Road lieutenant Peter Nash pleads guilty (Naked Security)

Crypto Trader Daily – 7 March 2015

Price Action

Today was relatively quiet with $270-$276 range bound trading. The $270 purgatory will be shattered soon either on the upside or downside. At the present moment there doesn’t seem to be a robust case for either direction, so better to sit back and wait for the market to speak.


Trade Ideas

30 day realised volatility has fallen off a cliff since the beginning of 2015. If you believe big up or down moves are ahead in March, consider buying BVOLH15 to profit from a spike in realised volatility.


In the News

Where in the world is FriedCat? (BTC Reporter)

HK Police arrest 5 in MyCoin ponzi scheme (CoinTelegraph)

Bitcoin micro-payments debut on several chat platforms (CoinDesk)

BVOLG15: A Postmortem

BitMEX launched the world’s first Bitcoin historical volatility futures contract called BVOLG15. The contract settles at the BitMEX 30 Day Historical Volatility Index (.BVOL Index) price. This post will serve as a postmortem describing the trading behavior of the first contract, and hopefully further educate traders as to how they can incorporate BitMEX volatility futures contracts into their portfolios.

.BVOL Index measures the annualised standard deviation of the % move between Time Weighted Average Price (TWAP) calculations done on Bitfinex every day from 10:00 GMT to 12:00 GMT. Because .BVOL Index comprises 30 days of price changes, there must be a total of 31 price increments. For BVOLG15, that meant the observation period lasted from 27 January 2015 to 27 February 2015 inclusive.

BVOLG15 was listed on 5 January 2015, meaning for three weeks traders were placing bets purely on their expectations of future realised volatility. Each day after 27 January 2015, a clearer picture was formed as to where 30 day volatility would realise by expiry.


The above graph shows a comparison of .BVOL Index and BVOLG15. BVOLG15 performed as expected. If there are N days until expiry, BVOLG15’s price is composed of N days of realised volatility expectations and (30 – N) days of realised volatility. Even as .BVOL spiked above 150% realised volatility, BVOLG15 did not rise to the same degree because the market did not expect that level of volatility to persist in the future. This is also evident in the volatility of volatility for both .BVOL Index and BVOLG15. The annualised volatility of .BVOL Index and BVOLG15 was 260% and 140% respectively.

Traders who believe they can accurately forecast realised volatility should utilise BVOL futures contracts. Intra-month they discount future realised volatility effectively. Traders need not hold until expiry, but can effectively move in and out of positions as expectations of future realised volatility changes.
This is a link to an Excel spreadsheet showing the .BVOL and BVOLG15 data that was used in the calculations and graph presented in this post.

Crypto Trader Daily – 26 February 2015

Price Action

A brief spark of action took the price down to $232 on Bitfinex, but it quickly recovered back to $237. All in all another snorefest.

Trade Ideas

Keep an eye on BVOLG15, which is coming up for expiry on Friday. The .BVOL index has dropped considerably in the last two days from 130% to 90%. There might still be a chance to catch some sleepy traders off guard.

In the News

RE/MAX to accept Bitcoin (CoinTelegraph)

Bank of England sees a future in Bitcoin (CoinTelegraph)

Utah authorises study on accepting Bitcoin (Washington Post)

Crypto Trader Daily – 24 February 2014

Price Action

All is quiet ahead of the return of the Chinese traders after the lunar new year holiday. A very quiet day with the price flirting around the $240 level. Trading volumes should begin to pick up tomorrow morning Asia time.

Trade Ideas

In anticipation of the return of price volatility, buy BVOLH15 (the historical volatility future expiring in March). 30 day realised volatility could climb back above 150% if January’s gyrations are repeated.

In the News

Another Bitcoin miner bites the dust (CoinDesk)

Ryan Kennedy of Moolah arrested in the UK (Coinfire)

Troika happy with Greek proposed reforms (Zerohedge)

Crypto Trader Daily – 17 February 2014

Price Action

Extend and pretend is the name of the game from Europe. Another critical meeting, and another episode of can kicking. No new news on Greece, and another day of $230-$240 range bound trading for Bitcoin. The Chinese New Year lull has officially set in.


Trade Ideas

Selling realised volatility for February during these times is prudent. Trade the BVOLG15 (27 February 2015) realised volatility futures contract. After an eventful end of January and start to February the contract has been bid up. If trading continues this way until the end of next week, realised volatility should decline.


In the News

Netagio shutters Bitcoin exchange (ConDesk)

2,180 Bitcoin foundation members barred from voting (CoinTelegraph)

VICE interviews Winklevoss twins (VICE)

Bitcoin Volatility As An Asset Class

Volatility is the measurement of a financial instrument’s price variation over time. Volatility as an asset class refers to isolating this variable and trading it as a standalone product. Usually volatility is isolated by the trading of delta hedged call and put options. Currently Bitcoin does not have a liquid options market so this method of isolation does not exist. However this does not preclude the existence of tradable Bitcoin volatility.

BitMEX is leading the market in innovations around the trading of volatility absent an options market. The BitMEX 30 Day Historical Volatility Index futures contract (BVOL) and the XBT vs. XBU pseudo volatility allow investors to trade Bitcoin volatility on BitMEX.

Why Trade Volatility?

Trading volatility allows investors to profit from the price movements or lack thereof. They need not predict the direction of the Bitcoin price. Event driven traders can profit from price gyrations after major news or market events which increase volatility. Conversely investors anticipating periods of relative inactively can sell volatility and profit from a quiet or sideways market. The addition of Bitcoin volatility adds another weapon to savvy investors’ alpha arsenal.

BitMEX 30 Day Historical Volatility Index Futures (BVOL)

On 5 January 2015, BitMEX launched the world’s first historical volatility index future with the ticker BVOL. The futures contract allows investors to bet on where 30 day volatility will realise. The BitMEX 30 Day Historical Volatility Index tracks the rolling 30 day realised volatility by using daily 10:00 GMT to 12:00 GMT 1 minute Time Weighted Average Prices on Bitfinex for Bitcoin / USD. The product is quoted in annualized volatility % points and investors make or lose 0.01 Bitcoin per 1% point move.

Forward Starting Historical Volatility

The BVOL futures contracts expire on the previous 30 days realised volatility. However, the contracts are tradable before the 30 day observation period starts. This allows investors to trade their expectation of where future historical volatility will realise. If it is 1 January 2015 and an investor is trading the BVOLG15 contract (27 February 2015 expiry), the observation period does not begin until 29 January 2015 (30 days prior to expiry). The price of BVOLG15 reflects the market’s view on where historical volatility will be in the future.

This has interesting implications for the pricing of other Bitcoin derivatives. Bitcoin by some is viewed as a long dated call option. The most crucial component to valuing an option is the volatility of the underlying asset. On a longer term view, higher the forward expectations of Bitcoin volatility lead to more valuable call options and possibly Bitcoin itself.

If there are major market events that will occur at specific dates in the future, the forward expectations of volatility gauge how impactful the market believes these events to be. An investor’s view of the over or under appreciation of the magnitude of the event leads to trading opportunities through the volatility component.

As liquidity and interest grows in the BVOL futures contracts, we will list longer dated maturities. Once complete, investors will have a term structure for expected future Bitcoin historic volatility. This is very useful for options traders pricing longer dated maturities. Using BVOL futures contracts as guide posts, options traders will be able to make markets in over the counter (OTC) options at tighter spreads and larger size.

Once the observation period has begun for a particular BVOL futures contract interesting arbitrage opportunities present themselves. Every day that passes there is more information about where the 30 day historical volatility will realise for a particular contract. BVOL prices too high or too low can be sold or bought vs. a knowledge of the magnitude of impact future prices can mathematically have on realised volatility.

XBT vs. XBU Pseudo Volatility

BitMEX offers two types of futures contracts, the XBT and XBU chain. The XBT chain is quoted in USD but has a XBT multiplier, a quanto style future. Therefore, buyers of XBT chain contracts have unlimited upside, but can only lose 100%. The XBU chain is worth $100 of Bitcoin at all times and is quoted in USD, an inverse style future. Therefore, sellers of XBU chain contracts have unlimited profit potential on the downside, but can only lose 100% if the price moves higher. The XBT chain is an X function, the XBU chain is a 1/X function. All else being equal, for a given maturity the XBT chain should trade at a greater price than the XBU chain. In USD terms multply each function again by X (Bitcoin / USD exchange rate), what is left is XBT – XBU = X * (X – 1/X) = X2 – 1.

Prices observed for the XBTH15 and XBUH15 contract confirm this theory. XBTH15 has been trading at a $25-$40 premium to XBUH15 on BitMEX. Because both contracts have the same maturity, this difference represents a pseudo strangle. A strangle is an options strategy where one buys a put and a call with the put having a lower strike price than the call, and both options having the same maturity. This is a volatility play; buyers of the strangle hope that realised is greater than implied volatility.

Traders who believe the realised volatility will be less than the pseudo implied volatility should sell XBT and buy XBU; those who believe the opposite should buy XBT and sell XBU. For sellers of pseudo volatility, if spot trades outside the profitable range, losses will accumulate in a non-linear fashion.

In the absence of traditional options straddles and strangles, pseudo volatility is a way for traders to express their views on implied volatility for a particular maturity.

Combining BVOL and XBT vs. XBU Pseudo Volatility

The difference between same maturity pseudo implied volatility and realised volatility through BVOL presents trading opportunities. If pseudo implied volatility is much higher than BVOL expected realised volatility, sell pseudo implied volatility (sell XBT, buy XBU) and buy BVOL. If pseudo implied volatility is lower than BVOL expected realised volatility, buy pseudo implied volatility (buy XBT, sell XBU) and sell BVOL.

The addition of volatility products on BitMEX has added three new trading strategies for investors. All of which do not call for the prediction of the direction of the Bitcoin / USD exchange rate.

BitMEX Launches Bitcoin Volatility Futures Contracts

We are proud to announce the launch of the world’s first Bitcoin 30 Day Historical Volatility Futures Contract (BVOL). The product will allow traders to speculate on the 30 day historical volatility of Bitcoin / USD as observed on Bitfinex. Traders will now be able to profit on the increase or decrease of Bitcoin price volatility without taking a position in the exchange rate.

Wikipedia defines volatility as, “a measure for variation of price of a financial instrument over time. Historic volatility is derived from time series of past market prices.” BitMEX has constructed a 30 day historical volatility index by taking the daily 10:00 GMT – 12:00 GMT 1 minute Time Weighted Average Price (TWAP) for Bitcoin / USD on Bitfinex. Each daily index value represents the realised volatility over the past 30 days. The futures contract on settlement day will equal the index value on that day.

The futures contracts have the symbol BVOL and expire on the last Friday of every calendar month at 12:00 GMT. The contract is quoted in annualised volatility % points. A futures price of 50.00 corresponds to an annualised volatility of 50.00%. For each 1% point movement, traders stand to make or lose 0.01 Bitcoin.

The futures contracts will be margined the same as all other BitMEX futures contracts. Initially up to 5x leverage will be allowed on this product. Margin, profit, and loss are all denominated in Bitcoin. As the liquidity grows, we will gradually increase leverage on this product.