- Crypto traders remain worried about a tail risk kind of event for Bitcoin (BTC) with further downward volatility ahead.
- Bitcoin continues to show weakness on the technical chart with the BTC price taking a dip under $26,000.
Although the world’s largest cryptocurrency Bitcoin (BTC) seems to stay afloat at $26,000 levels, it clearly lacks a major catalyst to drive the price higher. In fact, technical charts show that Bitcoin is currently within the grip of the bears with greater chances of further price correction.
As a result, crypto traders are fearing a tail risk kind of event happening for Bitcoin. A “tail risk” in the crypto space represents the possibility of an asset shifting by three standard deviations from its present price due to an uncommon occurrence.
Traders are concerned about the occurrence of such an incident in Bitcoin (BTC), despite the cryptocurrency remaining relatively stable around the $26,000 mark after a more than 10% drop in the week ending on August 20. The seven-day historical or realized volatility of BTC has reduced to 26% from its previous level of nearly 60% observed earlier in the previous week, as reported by Amberdata.
Griffin Ardern, volatility trader from crypto asset management firm Blofin, said: “Bitcoin’s butterfly index has risen to yearly highs. It shows investors and market makers are pricing in tail risk”. The butterfly index assesses the relative value of out-of-the-money (OTM) call options with higher strike prices and lower strike put options by comparing Deribit’s bitcoin volatility index (DVOL) with the at-the-money (ATM) volatility.
An elevated index suggests a relatively heightened interest in OTM options or call options at strikes above Bitcoin’s current price, as well as puts at strikes below Bitcoin’s current market rate. In essence, this signifies traders’ concern about tail risk or their responsiveness to uncertainty.
Volatility Ahead in Bitcoin Price
Calls are derivative agreements that grant the buyer the option to purchase the underlying asset at a predetermined price in the future. Conversely, a put option provides the right to sell. A call buyer indicates a bullish outlook on the market, whereas a put buyer expresses a bearish sentiment.
The interest in out-of-the-money (OTM) calls and puts increases when traders expect a price movement beyond the norm. Greg Magadini, director of derivatives at Amberdata, said:
“Looking at the BTC butterfly index, we can see that wings are near the upper 90% percentile (red horizontal line). So, [while]outright volatility [metrics]seems confident in spot price consolidation, traders are still paying up for tails”.
Additionally, the Bitcoin price also continues to show weakness on the technical chart. Bitcoin faces resistance at the upper trend line of the triangle pattern, indicating continued selling by bearish traders during upward movements. This situation has constrained BTC’s price within the range of $25,300 to $26,800. Presently, the BTC price stands at $26,041, reflecting a minor increase of 0.02% within the last 24 hours.
A consolidation near the lower end of the triangle pattern would serve as a negative signal, implying that bullish traders are not actively entering the market. The current focus for bulls is to push the BTC price above the EMA20 moving average to reinforce their long positions. Nonetheless, the RSI level remains below the midline, granting an advantage to bears in protecting against an immediate upsurge.
Should the price dip below the $25,300 threshold, it might trigger stop-loss orders for various traders, potentially initiating a wave of liquidation for long positions. This scenario could lead to a downward trajectory in the BTC price, possibly reaching the critical support level of $24,700.