7-Day Bitcoin Fear Gauge Hits All-Time High of 138%
There’s been a lot of hype about a bitcoin fear index.[1] And even a ‘fear and greed’ index.[2] So be careful of a name.
The original ‘investor’s fear gauge’ is the VIX index
The VIX is derived entirely from a snapshot of current prices of standard European puts and calls on the S&P 500. It is an index, commonly known as the stock market fear gauge.
The index formula is the fair-value swap rate for realized volatility over the next 30-days.[3] As such it represents informed traders’ views about S&P stock price volatility over the next month. The CBOE provides daily quotes on a 30-day VIX.
Likewise, the BITIX is a bitcoin fear gauge derived entirely from a snapshot of prices of puts and calls on bitcoin.[4] But underlying bitcoin prices move much, much faster than stock prices. So, we don’t just provide daily quotes on a 30-day index. We provide quotes, updated every 15-minutes, on BITIX indices for forthcoming bitcoin volatility between 1 week and 3 months ahead.[5]
n-day BITIX uses a snap-shot of prices of n-day bitcoin options to imply the views of informed traders about the average volatility of bitcoin prices over the next n-days.
Using the Deribit API we download trade price data on bitcoin options for a standard VIX-type calculation. This way we quote BITIX (and ETHIX) for time-horizons of between 7 and 90 days. [6]
The figure above shows the evolution of the BITIX term structure over the last 4 months.[7] On 26 June the 7-day BITIX hit an all-time high of 138%. Just 3 months earlier it was only 40%. The 7-day BITIX changes much more than a longer-term BITIX because views about average volatility of underlying bitcoin prices over the next month, or the next 3 months, don’t change that much over time. Currently the 7-day BITIX is 10% higher than the longer-term BITIX indices, but in March it was 20% lower.
Like the VIX, BITIX goes through volatile periods of backwardation (short-term BITIX greater than long-term) and more tranquil periods of contango (the other way around). However, while the VIX only jumps up when stock markets crash, currently the BITIX jumps up only when bitcoin prices rise. Put simply, this means that bitcoin returns tend to get more volatile after price jumps up, than after equal-sized jumps down. Which is exactly the opposite to equities.
But that is just during the last few months, when all crypto markets have been in a high-volatility state. In the low-volatility state bitcoin acts more like equities. So if/when we reach a calmer period, the BITIX indices will increase following falls, not rises, in bitcoin prices.[8]
An associated indicator, which is a powerful tool for representing trader’s views on the future direction of price changes, is the Put-Call Ratio (PCR). This is derived from the ratio of 24hr trading volume on puts divided by the 24hr trading volume on calls. A PCR greater than 1 means that more puts are traded than calls, which indicates that traders anticipate a fall in the bitcoin price.
The figure above plots the evolution of the PCR for bitcoin and the PCR for ether over the last month, every 15 minutes. Throughout June, the BTC PCR was less than one — indicating that traders anticipated a rise in bitcoin prices — except on 5 June, 10 June and during the 3 days following 26 June.
The anticipation of price rises on ether (indicative of the ETH PCR being much less than one) were even stronger in June. However, just during the last few days, some unusually large trades on ether put options (e.g. 700 options in one trade on 4 July) made the ether PCR go crazy. The PCR of more than 3 (that is, three times more puts traded than calls on ether) has just returned to a more normal level, which is well below ½ . During the last 24 hours, 8243 calls and 1848 puts were traded on Deribit in many smaller trades. This is another strong indication of an imminent ether price rise.
Carol Alexander and Arben Imeraj
6 July 2019
Professor Alexander leads the Crypto Asset Risk group of the Quantitative Fintech Network (QFIN) at the University of Sussex.
Arben Imeraj is a Masters student in Mathematics at the Technical University of Munich.
NOTES:
[1] December 2014, Coinbase: BitMEX to Launch Bitcoin ‘Fear’ Index. Journalist Joon Ian Wong reports that a standard historical 30-day volatility will become bitcoin’s first version of VIX. Or is it a realized volatility index? “It will give a glimpse into where market participants see the volatility realising in the future,” said Arthur Hayes, BitMEX’s chief executive. We say…..Poppycock. You can’t get a glimpse into the future from historical bitcoin returns. Only an options-based index can do that.
[2] Bitcoin so-called ‘fear and greed’ sentiment indices can be found in several places like coininquire.com and alternative.me — but these are just standard indicators derived from bitcoin prices, trading volumes, twitter, google trends etc. The Cryptocurrency Market Risk group at the University of Sussex is developing sentiment indices for several coins using all these data and much more, analysed using machine learning tools including NLP (natural language processing). Watch this medium channel for further announcements.
[3] Realized volatility is a forward-looking statistical volatility. Statistical volatility is based entirely on underlying returns — nothing to do with option prices. But option prices are necessary for implying forward-looking expectations from the behavior of option traders — particularly the trades on out-of-the-money calls and puts.
[4] We would have called our bitcoin fear gauge BIX, after the VIX, but we couldn’t — BIX is already the bunker index (in shipping). And anyway, we also quote ETHIX (same term structure, and again every 15 minutes) which are similar fear indices for ether — and ETHIX is a name close to our hearts, given all the hype about crypto.
[5] Note that, since January this year, LedgerX have provided quotes on a 30-day index called LXVX. The chief executive explains it is an index which tracks the expected volatility of bitcoin. “[A volatility index] tells you the expected certainty that the market is forecasting….” Our emphasis. Sorry, but expectation is not an adjective one can apply to either volatility (i.e. standard deviation) or certainty (i.e. probability). But names aside, 30 days is a very, very long time in bitcoin markets. And LXVX is only quoted every 2 hours.
[6] It is well-known that this formula has jump and discretization errors which make it inaccurate during highly volatile periods. There are several other and better ways to calculate a volatility fear gauge from option prices. See Leontsinis, S. and C. Alexander ‘Arithmetic Variance Swaps’ Quantitative Finance Vol. 17 (№4) 551–569 — also for the formulae to calculate skew and kurtosis fear gauge indices.
[7] The 30-day index (dark green line) is like LXVX except that we don’t filter the strikes to range only from 25% and 75% delta. That is, not much of a jump from the at-the-money strike. Our options data go deeper out-of-the-money (OTM) provided sufficient trading volume is there — this way, BITIX really captures the fear of large price jumps.
[8] These statements are fully justified and explained in detail in Section 5 of Alexander, C. and M. Dakos ‘A Critical Investigation of Cryptocurrency Data and Analysis’. Forthcoming in Quantitative Finance Vol 20 (№1).
Annotations for BITIX Chart:
02 APR 05:00 to 03 APR 03:00 BTC spot return +20%
7-day BITIX from 45% to 85% →strong fears of volatility lasting a week ahead
30-day BITIX from 50% to 70% →milder fears of volatility lasting for the month ahead
11 MAY 06:00 to 13 MAY 16:00 BTC spot return +17%
7-day BITIX from 72% to 115% →strong fears of volatility lasting a week ahead
30-day BITIX from 72% to 105% →fears of volatility lasting for the month ahead
90-day BITIX from 71% to 95% →milder fears of volatility lasting for 3 months ahead
26 JUNE BTC jumps from $11,750 to $13,900 and then back to $11,750
7-day BITIX from 98% to 138% →very strong fears of volatility lasting a week ahead
30-day BITIX from 97% to 120% →strong fears of volatility lasting for the month ahead
90-day BITIX from 94% to 110% →strong fears of volatility lasting for 3 months ahead
