Traders fear such an event in Bitcoin (BTC) even though the cryptocurrency has been listless around $26,000 since falling over 10% in the week ended Aug. 20, said Griffin Ardern, volatility trader from crypto asset management firm Blofin. Bitcoin’s butterfly index has risen to yearly highs. It shows investors and market makers are pricing in tail risk.
The butterfly index gauges the relative richness of the out-of-the-money (OTM) higher strike call options and lower strike put options by comparing crypto exchange Deribit’s Bitcoin volatility index (DVOL) with the at-the-money (ATM) volatility. An elevated index indicates relatively stronger demand for OTM options (wings) or call options at strikes higher than BTC’s current price and puts at strikes lower than BTC’s going market rate. This signifies traders’ fear of the tail risk or sensitivity to uncertainty.
The pricing for tail risk is consistent with the lingering macroeconomic uncertainty. Federal Reserve Chairman Jerome Powell reaffirmed that the central bank remains committed to hitting the 2% inflation target and keeping it there while signaling that the monetary policy will remain tight for longer than expected. This has lifted bond yields to the highest since 2007, weighing over risk assets, including cryptocurrencies.
A key insight from Jerome Powell is that ‘getting inflation back to 2% likely requires below-trend growth’, meaning he isn’t afraid of some pain to the economy and jobs market, said Greg Magadini, director of derivatives at Amberdata.
Ardern said the tail risk will likely remain higher in the lead-up to Friday’s U.S. nonfarm payrolls report. The Wall Street Journal predicts the data is likely to show the U.S. economy added 200,000 jobs last month following June’s 209,000 additions, resulting in the jobless rate holding steady at 3.6%.