Bitcoin's Bull Run: Predicting a $50k Surge in 2023

• Bitcoin's Present Market Scenario and Predictions
• Comparative Analysis of Bitcoin's Rally in Q4 2023 and Q4 2020
• Historical Analysis of Bitcoin's Implied Volatility
• Comparison of Historical Futures Basis
• Significance of Variance Risk Premium (VRP) in Bitcoin Trading
• Understanding Implied Volatility Kink
• Concluding Remarks

Bitcoin's Present Market Scenario and Predictions

Bitcoin$42,260 -0.64%'s performance in 2023 has been remarkable, reaching new heights. However, questions arise if the market is over-stretched or if the peak of enthusiasm has been attained. To better understand such queries, a close observation of the crypto options market's positioning is necessary.

Comparative Analysis of Bitcoin's Rally in Q4 2023 and Q4 2020

It appears that the rally of Bitcoin in Q4 2023 closely mirrors the pattern seen in Q4 2020. This is evident when the BTC returns for both these years are superimposed, thus revealing a strikingly similar narrative. The implied volatility of options, which signifies an investor's speculation on BTC's future realized volatility, is near its peak in 2023. Such movements are mainly due to call options' purchase and might hint that the market is already factoring in the massive upside potential.

Historical Analysis of Bitcoin's Implied Volatility

However, a historical review of the implied volatility of Bitcoin over the previous four years suggests a relatively subdued trend. This indicates that Bitcoin has yet to exhibit the volatile rally it has been known for. The implied volatility of options was approximately 150% when Bitcoin spiked in Q4 2020, whereas it currently sits around 50%.

Comparison of Historical Futures Basis

A comparison between the historical futures basis today and January 1, 2020, further deepens the analysis. On the mentioned date, the futures basis on Deribit was approximated at 20% annualized, around 17 times higher than the 10-year risk-free rate. In contrast, the futures basis nowadays is roughly 10% or 2.4 times the corresponding risk-free rate. Such significant differences between the current situation and that of 2020 do not confirm higher spot prices but show that potential buying power is mostly unutilized.

Significance of Variance Risk Premium (VRP) in Bitcoin Trading

Furthermore, it is essential to mention that the price option traders are willing to pay for implied volatility is closely connected to the actual volatility Bitcoin is experiencing, a concept often recognized as the Variance Risk Premium (VRP). This VRP has been expanding since mid-October. Recent trends suggest that option traders consistently pay a premium over Bitcoin's realized volatility, in anticipation of potential explosive movements.

Understanding Implied Volatility Kink

The market is currently exhibiting a unique implied volatility kink for the upcoming January option expiration month. This mirrors the market's anticipation regarding the decision of the Securities and Exchange Commission on Bitcoin ETFs' approval/denial, which is expected to cause significant market movements. The forward volatility, the real implied volatility differential priced between the December 29 expiration and the January contract, is approximately 57%, a 12-point premium, or about 30-day realized volatility of 45%.

Concluding Remarks

This trend either indicates that option buyers are making overpriced and incorrect bets or suggests that the substantial volatility in Bitcoin will persist and even escalate.

Edited by Jonathan Stoker