A number of data show that the market will continue to be in a downturn in the short term. The uncertainty in the options market is huge, and most investors in the futures market are forced to close their positions. Market panic is spreading, and liquidity has not yet returned to normal levels. A reasonable risk control mechanism is a necessary condition for survival.

The recent sharp drop in the price of Bitcoin has caused market panic, and the liquidity of buying orders has tightened sharply. The price of Bitcoin fell all the way from $7,000 to $5,000 and has not stopped falling. After dropping to $4,000, it quickly rebounded to $6,000. Over $90 million in market value was wiped off during this huge ups and downs. Over the past week we have seen both the stock market and the digital asset market fall sharply, with Bitcoin hovering around $5,000 at the time of writing.

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Options Market Data: Huge Market Uncertainty

Based on the option data of Deribit Exchange on March 11 and 13, 2020, the implied volatility curves of options with different maturity periods are drawn. The different curves represent options with different maturities, and each curve is composed of option implied volatility at different strike prices.

The reason for this phenomenon is that when the market is stable, market investors hope that the price of Bitcoin will not fall, but they fear that the price of Bitcoin will fall, so a large number of investors buy out-of-the-value put options to hedge risks. The increase in demand raises the price of the out-of-the-money put option, which also raises the implied volatility of the out-of-the-money put option.

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In the March 11 data, the implied volatility curve for options expiring in April, June, and September shows a consistent downward trend for options expiring in March, which is consistent with the implied volatility of options expiring in March. Volatility curve charts are different.

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On the eve of the panic in the digital asset market on March 11, the implied volatility of the options market had a relatively reasonable reverse slope. On March 13, the implied volatility curve of digital asset options changed drastically. Options with expiry dates of March 14 and 20 During the panic, option implied volatility jumped sharply, ranging from 250% to 500%. The random, high implied volatility of options that expire on March 20 shows that the digital asset market is in a period of instability.

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On March 13, the implied volatility of options due in April, June, and September showed a different trend from that of options due in March. Options expiring in April exhibit a positively sloping implied volatility curve. The implied volatility curve for options expiring in June and September is irregular.

April, June and September options (BTC) implied volatility curves on March 13, 2020

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The market predicts that the probability that the price of Bitcoin will return to before the sharp drop ($7,500) in March is only 13%. In the long run, the probability that the price of Bitcoin will exceed $10,000 in September 2020 is only 12%. In the short term the market will remain in a downturn.

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Source: Skew

BTC At-the-Money Option Implied Volatility Term Structure, March 14th 2020, 8:30PM (GMT+8)

Source: Skew

The reversal of the implied volatility of at-the-money options means that the market risk release signal is strong. In addition, the difference between the implied volatility of 1-month options and 3-month options is greater than the difference between the implied volatility of 3-month options and 6 The monthly difference is also a signal of risk release.

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The figure shows that when the market sells off, the funding rate of BTC perpetual swap contracts on many exchanges is lower than 0, which encourages short positions to close. Although the capital rate of BTC perpetual swap contracts in the current market has slowly returned to the 0 baseline, most of them are still negative.

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The above chart shows that the open interest fell when the market fell sharply, indicating that most investors were forced to close their positions, and the market continued to be bearish in the short term. Bitmex BTC/USD liquidation data (below) also supports this view, showing that when the market began to sell off, the liquidation volume increased significantly.

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BitMEX XBTUSD liquidation data, March 14th 2020, 8:30PM (GMT+8) Source: Skew

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