Why do we say that the current market conditions resemble Q4 2020 and BTC will reach $50,000?

Why Do We Believe the Current Market Situation Resembles Q4 2020 and Predict That BTC Will Reach $50,000?

Author: Greg Magadini, CoinDesk; Translated by: Song Xue, LianGuai

Bitcoin recently hit a new high in 2023, but there’s a lingering question: Is the market overextended, have we reached the peak of enthusiasm? We can delve into these questions by examining the positioning of the cryptocurrency options market.

The most fitting comparison to the fourth quarter of 2023 is the rebound we saw in the fourth quarter of 2020. In fact, by overlaying the BTC returns from these two years, we can see an astonishingly similar story unfolding.

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(BTC spot performance in green in 2020 and orange in 2023)

Currently, the implied volatility of options (representing investors’ bets on BTC’s future volatility) is hovering near the peak of 2023, driven primarily by the purchase of call options. This may indicate that the market has already priced in the explosive upside potential we all hope for.

However, when we look back at the implied volatility of BTC over the past four years, it still remains relatively low, indicating that BTC has yet to show the explosive rebounds it has achieved in the past. When BTC soared in the fourth quarter of 2020, the accompanying option volatility peaked at around 150%, whereas today it is around 50%.

(BTC implied volatility for “at-the-money” options)

We can also compare today’s historical futures spreads with those from January 1, 2020. Back then, Deribit’s futures spread had an annualized rate of 20%, equivalent to 17 times the risk-free rate of a 10-year bond. Today, the futures spread is around 10%, or 2.4 times the equivalent risk-free rate. The significant difference between now and 2020 doesn’t necessarily indicate that spot prices will rise, but it does suggest that potential buying power is still largely in a wait-and-see mode.

Lastly, it’s worth noting that the implied volatility option traders are willing to pay is closely related to the actual volatility (realized volatility) that Bitcoin is experiencing, which has hit new lows in 2023. This relationship is often referred to as the Variance Risk Premium (VRP), which has been expanding since mid-October. Recently, option traders have been willing to pay a premium higher than Bitcoin’s actual volatility, as they anticipate the possibility of explosive fluctuations in Bitcoin.

(BTC “fair value” implied volatility term structure)

Currently, we are witnessing a particularly pronounced increase in implied volatility, which is happening in the month of January options expiration. This reflects market expectations that the Securities and Exchange Commission will approve/reject Bitcoin spot ETF, causing market fluctuations.

The forward volatility (the actual implied volatility difference between the December 29th expiring contract and the January contract) is currently around 57%, a 12-point premium compared to the 45% 30-day actual volatility.

This situation either indicates that options buyers have made a wrong and overpriced bet or that Bitcoin’s significant volatility will not only continue but also become greater.

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