Learn how to use implied volatility to analyze Bitcoin

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

Implied volatility indices such as Deribit’s DVOL and Volumex’s BVIV can complement traditional technical analysis by providing insights into market sentiment and expectations.

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; 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 specific Ethereum instruments through the symbols of DERIBIT and VOLMEX, whose line of reasoning is the same.

Understanding how to interpret the graph:

1. High DVOL/BVIV values ​​indicate that the market expects higher volatility in the next 30 days. This is usually associated with uncertainty, fear, or expected major events.
2. The index does not indicate the direction of the price, but rather whether volatility will increase or decrease.
3. Low values ​​indicate an expectation of lower volatility and are generally associated with calmer, more optimistic markets.
4. To get an idea of ​​Bitcoin’s expected daily movement, simply divide the DVOL value by 20. For example, a DVOL of 100 indicates an expected daily movement of 5%.
5. Divergences between Bitcoin price and DVOL/BVIV could signal inflection points.
6. Rising price with falling DVOL/BVIV may indicate exhaustion and a potential top.
7. Price falling with falling DVOL/BVIV may indicate exhaustion and a potential bottom.

For example:

The BTC price here is at the top, in white. The DVOL and RSI of DVOL are both in red. The reason I put the RSI here is that it makes it easier to analyze the DVOL, as the values ​​are in a fixed range, making them easier to interpret.

On March 25, 2022, the RSI shows a contracted value of 30, i.e. low implied volatility. This anticipates a period of calm that precedes a period of unrest. In this case, the “unrest” soon materializes into a period of falling prices.

When the RSI then reaches the upper limit of the range, at 83 (on May 12, 2022), a volatility spike is characterized. Then, after that, volatility begins to decrease. This decrease in DVOL volatility corroborates Bitcoin’s lateralization moment within the orange box.

Concluding

While DVOL and BVIV should not be used in isolation, they can be valuable tools for confirming Ethereum and other crypto chart signals and anticipating big moves.

Incorporating implied volatility analysis into your strategy can improve entry/exit timing and help manage risk.

Idea developed by andre_007

Disclaimer: The text presented does not necessarily reflect the opinion of Todaysgist.

Follow Todaysgist on