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- The Bitcoin DVOL, a measure of volatility, surged from 36% to 48.5% on an annualized basis.
- The annualized funding rates on OKX, Deribit and Bybit plummeted to a staggering -10%.
Funding rates for global listings of perpetual futures in Bitcoin (BTC) experienced a sharp decline on late Thursday, triggered by an abrupt price slump that jeopardized the newly favored short volatility positions.
Perpetuals represent futures contracts that do not have an expiration date. They incorporate a funding rate mechanism designed to align perpetual prices closely with the underlying index price. A negative funding rate signifies a prevalence of pessimistic short positions, where short sellers compensate long holders to maintain their active bets. Conversely, positive rates indicate the opposite scenario.
On Thursday, funding rates on OKX, Deribit, and Bybit experienced a sharp decline, plummeting to levels as low as -10% or even more when annualized. This drop coincided with a significant drop in the average price of Bitcoin, which fell to $25,392, as reported by the data source Velo. Notably, the Bitcoin DVOL, which measures the Deribit Implied Volatility Index indicating the expected price volatility over a 30-day period, surged from an annualized 36% to 48.5%.
Possibly, traders who engaged in shorting options over the past few weeks, a widely used tactic to capitalize on an ongoing period of low volatility, opted to sell perpetual futures as a hedging measure to reduce potential risks stemming from sudden spikes in volatility. This action drove perpetual futures into a significant discount, further contributing to the downward spiral in prices.
"For BTC, option sellers were short too many put options, for more investors were previously bullish, selling put options to finance buying call options to reduce costs. So the sudden and unexpected price drop lead to hedging behavior, catalyzing deeper decline," Griffin Ardern, volatility trader from crypto asset management firm Blofin, said.
According to certain anonymous market analysts on Twitter, the significant markdown in Deribit's perpetual futures can be attributed to the exchange offloading perpetual contracts as they simultaneously unwind a substantial short volatility position.
Deribit commands a dominant share of approximately 90% in the cryptocurrency options market. To put it differently, nearly all instances of selling volatility in the recent weeks have taken place on the Deribit platform. During a period on late Thursday, the BTC perpetual futures on Deribit were exchanged at a markdown of $2,000 compared to the average spot price of the cryptocurrency on other exchanges.
Lukk Strijers, the Chief Commercial Officer at Deribit, remarked that the exchange has recently made adjustments to its liquidation policy. These changes include the incorporation of a substantial discount in perpetual futures, which has contributed to the global occurrence of negative funding rates.
"Previously, Deribit only auto-liquidated options positions using perpetual/futures when possible, which was a form of Delta hedging as the first step to manage risk. Since early August, directly closing options positions has been a part of the liquidation algorithm as well. That logic has been changed to liquidate with whichever instrument is causing the issue and, therefore, more effective," Strijers told CoinCryptoUs.
