The options market signals an imminent change in market focus – from Bitcoin to relatively undervalued ether and other alternative cryptocurrencies.
The spread between the six-month implied volatility (IV) for Ether and Bitcoin – a measure of the expected relative price volatility between the two – has risen to a record high of 46%. According to data provider Skew, this exceeds the previous high of 45% on February 21, 2020. The three- and six-month spreads have risen to 11-month highs of 32% and 23%, respectively.
The widening of IV spreads suggests that the market expects ether and other alternative coins to see larger percentage moves than Bitcoin in the short term.
“Traders expect increased volatility for ether compared to Bitcoin,” Emmanuel Goh, CEO of Skew, told CoinDesk. “This is in line with a decreasing correlation and an increase in interest in alternative cryptocurrencies.”
Implied volatility is the market’s expectation of how risky or volatile an asset would be over a period of time, and is determined by the net purchase price of options and historical price volatility. Ether is the second largest cryptocurrency by market value, and many other so-called altcoins are based on Ethereum’s blockchain technology. Alternative cryptocurrencies therefore tend to trade in accordance with ether.
The one-month spread has quintupled since December 30, along with a weaker positive correlation between ether and bitcoin.
The realized three-month correlation has fallen from 67% to 56% in the last five days and, according to the Skew data source, has reached its lowest level since March 2018. The trend is likely to continue, as shown by the widening of the IV spreads.
While a rising volatility spread implies scope for relatively larger percentage movements in altcoins, it says nothing about the direction of movement.
However, alternative cryptocurrencies are now looking cheap compared to Bitcoin and the market is extremely optimistic. Alts could soon see larger percentage increases than the crypto market leader Bitcoin, as analysts predicted earlier this week.
Though Ether rose from $ 700 to $ 1,200 this month, it’s still nearly 20% below its record high of $ 1,432.88 in January 2018. Likewise, Litecoin, star, chain link and other prominent coins must still reach new highs for life. At a current price of over $ 37,000, Bitcoin is up over 60% from its life high of $ 19,783 registered three years ago.
Some may argue that implied volatility reflects investors’ expectations of price turbulence and may not be reflected in future charts. However, historical data shows that implied volatility spreads are reliable indicators of impending market shifts. For example, the Ether-Bitcoin IV spread crashed in the second half of September 2020, warning of a big move in Bitcoin. The cryptocurrency significantly outperformed most other cryptos in the final quarter of last year, rallying 168%.
