The difference between the implied volatility of ETH and Bitcoin (BTC) may be giving us indications of where the market will go soon.
To begin with, while BTC has taken off, Ethereum is relatively undervalued and other alternative cryptosystems. We can confirm this by analyzing the difference between the six-month implied volatility levels for both cryptom currencies.
When analyzing the general panorama of the cryptomarket we will see some interesting changes in the last months. The most evident is the increase in the price of some cryptosystems such as Crypto Code however we cannot lose sight of the options market. Right now, the option market is signaling an imminent change in market focus. Here are the details.
This indicator has risen to a record 46%. This exceeds the previous peak of 45% observed on February 21, 2020, according to data provider Skew. The three- and six-month spreads have risen to an 11-month high of 32% and 23%, respectively.
One-month implied volatility differential of Ethereum – Bitcoin Source: SkewOne-month implied volatility differential of Ethereum – Bitcoin Source: Skew
Bitcoin continues its historical career, what has driven it?
Analyzing these differential levels of implied volatility between Ethereum and Bitcoin
Implied volatility is the market’s expectation of how risky or volatile an asset would be during a specific period. It is driven by net option buying pressure and historical price volatility.
Ethereum (ETH) is the second largest crypt currency by market value, and many other so-called altcoins are based on Ethereum’s blockchain technology. As such, alternative crypt currencies tend to trade in line with ETH.
The widening of implied volatility spreads indicates that the market expects ETH and other alternative currencies to plot larger percentage movements than Bitcoin in the short term.
„Traders expect higher volatility of ETH relative to Bitcoin,“ said Skew’s CEO, Emmanuel Goh, in an interview. „This is consistent with a declining correlation and a surge of interest in alternative cryptomonics.
Some may argue that the implied volatility reflects investors‘ expectations of price turbulence and may not be reflected in the charts in the future. However, historical data shows that implied volatility spreads are reliable indicators of upcoming market changes.
What can you expect in the short term?
The one-month spread has increased fivefold since December 30, along with an increasingly weak positive correlation between ETH and Bitcoin.
According to Skew, the three-month correlation has decreased from 67% to 56% in the last five days to reach the lowest level since March 2018. It seems that the trend will continue, as suggested by the widening of implied volatility spreads.
While the widening of the volatility spread implies room for relatively larger percentage movements in altcoins, it tells us nothing about the direction of the movements.
That said, alternative crypt currencies now appear cheap compared to BTC and the market is extremely optimistic. Therefore, altcoins may soon be registering larger percentage gains than Bitcoin itself.