Recent data from Skew shows that Bitcoin's (BTC) implied volatility plummeted after yesterday'southward halving occurred. Generally, volatility is at the middle of any professional trader as it measures daily average price oscillations and gives insight into market atmospheric condition.

As previously reported by Cointelegraph, Bitcoin'south halving outcome tends to increase volatility due to its significant uncertainties. Traders anticipated that the price would either rally or dump during and subsequently the event, thus the curt term fasten. At the time of writing the metric has gone back to previous levels.

Uncertainties tin can drive volatility

For the by few months analysts accept spun the narrative that a meaning hashrate drop could occur after the halving. This would supposedly be driven by miners shutting down their ASIC-based operations due to Bitcoin's block subsidy cut to vi.25 BTC from the previous 12.5 BTC.

To engagement at that place even so is a valid concern of a 'death spiral' beginning, which would force large miners to sell reserves, and perchance even bankrupt those who are more leveraged. One possible driver of this breakup would exist the fact that revenue vital for miners has been cutting.

Keep in mind that transaction fees rarely exceed v% of miners' acquirement, which is equanimous mostly by this block subsidy reward. Cutting the $5 billion mining industry revenues past half tin produce wavelengths of unexpected results, including hard forks.

Traders rely on implied volatility, and the halving impacted this metric

BTC ATM Implied Volatility. Source: Skew

There are 2 ways of measuring volatility, either using historical data or analyzing electric current options marketplace premiums. It is of import to note that historical data has a disadvantage when approaching toll-sensitive events as it favors past movements.

For Bitcoin, volatility had been on a continuous reduction since its superlative after Bitcoin's $3,600 crash on March 12. Entering May, Bitcoin unsaid volatility stabilized around the 80% level equally the  Bitcoin's halving approached.

Options markets present a perfect fashion to measure out potential price swings because they rely on traders' pare-in-the-game. The higher premiums demanded by options sellers reflect increased fearfulness of incoming volatility.

As shown by the chart below, ATM options hateful that strikes used to calculate are at the coin, meaning $9,000 for the electric current Bitcoin (BTC) underlying price of $8,900.

Call (bullish) options pricing. Source: Deribit

Those are the standard for volatility measures due to their about absenteeism of intrinsic value. A buyer of a call (bullish) pick with a $7,000 strike faces a $1,900 intrinsic value, as Bitcoin is trading significantly above that level.

How traders may interpret the drop in implied volatility

Implied volatility reaching peak levels means options markets premiums spiked. This should be interpreted every bit the market charging higher for insurance, and information technology goes both ways for calls (bullish) and puts (bearish) options.

The basic strategy of buying a call option grants protection if the market goes up. By paying a premium upfront, one will and so be able to acquire Bitcoin for a predetermined toll. The opposite holds for the put option buyer, who's buying insurance in case of a sudden toll drop.

I matter to annotation is that a change in volatility is not a bullish nor bearish indicator. Unusually high levels reflect dubiety and should lead traders to ensure stop-loss orders are in place and significant margin deposited for leverage trades.

Low volatility does non equal lower chance

Some traders tend to extrapolate that low volatility scenarios mean lower risks for unexpected big candles. Residuum assured, there is no such indicator. 1 should apply such periods to build insurance positions via pick markets.

On the other mitt, if a trader is caught off baby-sit during a high volatility scenario, they should either close all positions to avoid unnecessary stop-loss execution or brace for ups and downs that will almost certainly liquidate leveraged traders.

For more than information on how to understand the complexities of the crypto market, have a expect at 10 tips to keep your crypto portfolio assisting during a crisis.

The views and opinions expressed hither are solely those of the author and do non necessarily reflect the views of Cointelegraph. Every investment and trading motion involves hazard. You should bear your own inquiry when making a decision.