Bitcoin (BTC) is approaching its fourth block reward halving on April 19, and with it, expectations of increased volatility are becoming more pronounced. The implied volatility (IV) of the largest cryptocurrency by market value has risen, indicating increased price turbulence before and after this event, which occurs approximately every four years. However, Greg Magadini, Director of Derivative Products at Amberdata, contrary to the tendency to bet on volatility increases before uncertain events, offers a cautious perspective, advising against optimistic speculation on volatility premiums.
Risk of Overpricing Volatility
Magadini emphasizes the predictability of BTC‘s block reward halving, suggesting that paying a premium for volatility in such a predictable event may not yield the desired returns. While the historical impact of reducing Bitcoin‘s block reward by 50% on BTC and miners has been extensively studied, investors often anticipate price fluctuations before and after the event by purchasing call and put options or volatility futures. Historical trends show that the price of the largest cryptocurrency has made significant gains in the 12-18 months following each block reward halving.
In contrast, Magadini points out that there has been a significant inconsistency between market expectations and actual outcomes in previous major events like Ethereum‘s Denali update and the approval and trading of spot Bitcoin ETFs in the US. Despite expectations for increased price volatility surrounding these events, the actual impact on the market was often below expectations, leading to disappointment for traders who took positions in event-driven volatilities.
According to Amberdata, amidst current market dynamics, Bitcoin’s 30-day implied volatility has risen from 68% to an annual rate of 75% over the past week. Moreover, the 30-day volatility risk premium (VRP), which represents the disparity between implied and realized volatilities, has exceeded 10% for the first time since the beginning of March. This trend indicates that options are overpricing implied volatility, especially in light of the upcoming block reward halving expectation.
Current State of BTC
Currently, BTC’s price is just above the $72,000 level, having risen by 4% in the last 24 hours, reflecting a notable recovery since the last dip to around $64,500 on April 2.
Magadini’s cautious stance is particularly significant as it reminds market participants of the complexities inherent in predicting the crypto market’s response to significant events during the ever-evolving and changing landscape leading up to the block reward halving.
