Crypto market could face more volatility as VIX hits highest level since COVID-19 market panic, Abra analyst says

The cryptocurrency market was first to react to the macroeconomic meltdown sweeping through global markets over the weekend, with one analyst forecasting more volatility is ahead.

"I expect implied volatility to be sustained at an elevated level in the cryptocurrency markets until the macro side calms down," Bohan Jiang, Abra's Head of OTC Options Trading, told The Block.

Jiang added that the majority of the options market participants were not prepared for the latest macroeconomic downturn.

"There had not been any demand for downside protection in the options market in recent weeks, with traders mainly focused on bullish catalysts: the market was positioned in topside calls, with bitcoin implied volatility going up to the high 60s ahead of Trump’s Bitcoin Nashville speech, and ether implied volatility increasing to the low 70s ahead of the launch of spot Ethereum exchange-traded funds (ETFs), as bullish sentiment became priced in," Jiang added.

The options trader described a derivatives market caught off guard by the recent macroeconomic downturn, which has seen the Chicago Board Options Exchange's CBOE Volatility Index (VIX) soar. In the past 24 hours, the VIX has surged to over 65 points, which is the highest it has been since the market panic at the beginning of the COVID-19 pandemic.

"The crypto options market had sold vol aggressively after both events resulted in spot selling off back into its past range, despite the fact that various macro events had already caused the VIX to grind higher over the past week," Jiang added.

Crypto downturn related to derivatives market position

Abra’s Head of Trading, Bob Wallden, said the cryptocurrency market was slow to react to the enfolding macroeconomic situation.

"As the macro narrative shifted the crypto market was still leaning towards an upside bias; with little to no hedging of downside risks," Wallden said.

Wallden pointed to the bitcoin and ether perpetual futures funding rate turning negative over the past 24 hours. "This has been the sharpest turn lower in funding rates this year, reducing the profitability of market-wide basis trades," he added.

According to Wallden, the latest downturn is based on how markets were positioned: "The market was skewed for higher moves around Donald Trump's appearance at Bitcoin 2024, with participants' long basis and option structures, so what we are seeing is a traditional wash out of these positions and an adjustment in collateral that backstopped some of these positions."

"The cryptocurrency market has been structurally built for a move higher, days like today validate the necessity for being prepared for multiple tail-risk scenarios," Wallden added.

Surging Japanese yen causes market turmoil

Many factors have impacted the current market turmoil, including the surging value of the Japanese yen, the latest jobs data in the U.S., fears that the Federal Reserve may struggle to achieve a soft landing, geopolitical tensions, and the deflating AI bubble.

"Macro sentiment has also taken a turn for the worse after poor U.S. unemployment data last Friday. In addition to that, yen carry trade unwinds across assets has caused volatility to spike sharply," QCP Capital analysts said.

Bitfinex analysts identify these factors as the primary contributors to the recent downturn in the cryptocurrency market.

"The crypto sell-off is macro-driven, we expect short-term support to be established around the $48,900 region, and if there is no bullish momentum, this region may be retested, with the macroeconomic environment at that time determining further price action," Bitfinex analysts added.

YouHodler Chief of Markets Ruslan Lienkha said the crypto market's downturn was exacerbated by low liquidity during weekend trading.

"Low liquidity during the weekend when institutions are typically inactive, and fiat fund transfers face difficulties inflated the downturn. Consequently, the market experienced a wave of margin calls on long positions. Following such a significant drop, we might see a corrective rebound in bitcoin's price. However, this increase will likely be limited due to the prevailing pessimism in the broader markets," Lienkha added.