How to use Implied Volatility Index to analyze Bitcoin

8월 21일

▮ Introduction

Bitcoin is known for its price volatility. Analyzing the price chart alone is often not enough to make buy and sell decisions.

Implied volatility indexes such as DERIBIT:DVOL and VOLMEX:BVIV can complement traditional technical analysis by providing insights into market sentiment and expectations.





▮ Understanding DVOL/BVIV

DVOL and BVIV measure the expected implied volatility of Bitcoin over the next 30 days, derived from real-time call and put options.

DVOL is calculated by Deribit, the world's largest Bitcoin and Ether options exchange.

BVIV is calculated by Volmex Finance; the data is extracted from exchanges (currently Deribit and OKX), and then combined into a single set.

* In addition to Bitcoin, it is possible to analyze Ethereum-specific instruments through the ticks DERIBIT:ETHDVOL and VOLMEX:EVIV, whose line of reasoning is the same.


▮ Interpreting the chart

🔶 High DVOL/BVIV values ​​indicate that the market expects greater volatility in the next 30 days. This is usually associated with uncertainty, fear, or expected major events.

🔶 The index does not indicate the direction of the price, but rather whether volatility will increase or decrease.

🔶 Low values ​​indicate an expectation of lower volatility and are usually associated with calmer and more optimistic markets.

🔶 To get an idea of ​​the expected daily movement of Bitcoin, simply divide the DVOL value by 20. For example, a DVOL of 100 indicates an expected daily movement of 5%.

🔶 Divergences between the price of Bitcoin and DVOL/BVIV can signal inflection points.

🔶 Price rising with a drop in DVOL/BVIV may indicate exhaustion and a potential top.

🔶 Price falling with a drop in DVOL/BVIV may indicate exhaustion and a potential bottom.


▮ Example



The price of BTC here is at the top in white.

The DVOL and the RSI of DVOL are both in red.

The reason I put the RSI here is that it is easier to analyze DVOL, since the values ​​are in a fixed range, therefore easier to interpret.

On March 25, 2022, the RSI shows a contracted value of 30, that is, low implied volatility. This foreshadows a period of calm that precedes a period of agitation.

In this case, the “agitation” soon materializes in a period of price decline.
When the RSI then reaches the upper limit range, at 83 (on May 12, 2022), a peak in volatility is characterized.

Then, after that, it begins to decrease. This decrease in volatility in DVOL corroborates the moment of Bitcoin’s lateralization within the orange box.


▮ Conclusion

Although DVOL and BVIV should not be used in isolation, they can be valuable tools for confirming price chart signals and anticipating major movements.

Incorporating implied volatility analysis into your strategy, can improve the timing of entries/exits and help manage risk.

⚠️ But remember:

Just because a strategy worked in the past does not mean it will work forever.
Past profitability is no guarantee of future profitability.
Do your own analysis and risk management.