Is Ethereum Safer than Bitcoin?
The implied volatility (IV) of Ethereum reached an all-time low, becoming approximately equal to Bitcoin’s IV. Why did it happen, and how can you trade it?
Ethereum IV Plunges
After spiking in November 2022, Ethereum IV was in a relentless downtrend. It recently dropped below the March minimum and reached an all-time low.
Ethereum DVOL index
The ratio of Ethereum IV to Bitcoin IV (as measured by the DVOL indexes) hovered in the 1.1-1.4 range this year until the Shanghai upgrade (staked earnings withdrawals) but moved into the 0.95-1.15 range after the upgrade. Unlike the Merge, the Shanghai upgrade failed to generate a large interest in Ethereum options, but the IV fell after the upgrade like after the Merge.
The ratio of Ethereum IV to Bitcoin IV (year-to-date)
The longer-term chart shows how unusual the current situation is. Even the high of the recent range (1.15) looks low compared with history.
The ratio of Ethereum IV to Bitcoin IV (all time)
Bitcoin Volatility Demand
This unusual situation is seemingly explained by flows seeking Bitcoin IV and largely ignoring Ethereum. The Deribit data shows large demand for Bitcoin volatility, steadily increasing since the year-end and peaking at the end of March when options bought during the recent banking crisis expired.
Bitcoin options open interest
Ethereum options' open interest has been declining since the Merge because legacy options mature and their holders seemingly don’t want to roll the exposure to Ethereum volatility.
Ethereum options open interest
Bitcoin volatility demand is likely linked with safe-haven flows driving spot Bitcoin outperformance vs broader crypto. However, higher volatility is generally associated with a higher risk, so it raises the question of whether Bitcoin may become a victim of its own success after attracting too much speculative interest.
Gold and Silver
Bitcoin and Ethereum are often compared to gold and silver, and I see the closest relevant examples from traditional finance in February 2016 and March 2022, when gold IV largely outperformed silver IV.
Silver IV was usually much higher than gold IV at least in the last 10 years (based on the data from the largest gold and silver ETFs). The ratio of silver IV to gold IV was around 2 in the last few years (and lower in earlier years). The ratio was relatively stable even in March 2020, when volatility moved a lot. In March 2020 gold IV skyrocketed from 10 to 38, and silver IV almost proportionally increased from 19 to 73.
However, February 2016 and March 2022 were different, as gold IV jumped while silver IV increased significantly less. In February 2016 there was the fear about a possible hard landing in China. In March 2022 Russia invaded Ukraine, sparking the fear of a larger war.
SLV (iShares Silver Trust) IV
GLD (SPDR Gold Shares) IV
Interestingly, in these two cases, further relative spot moves were completely opposite. Silver rose relative to gold after February 2016 but fell after March 2022. Absolute spot moves were the opposite, too, as both gold and silver (as well as most other commodities) advanced after February 2016 but declined after March 2022.
The ratio of SLV (iShares Silver Trust) to GLD (SPDR Gold Shares)
This example indicates that the very low ratio of Ethereum IV to Bitcoin IV may not say anything about future spot moves. Based on the examples, Bitcoin may easily continue to outperform.
The ratio of silver IV to gold IV in both cases returned to the previous levels in a few weeks, confirming that volatility is famously mean-reverting.
Conclusion
The very low ratio of Ethereum IV to Bitcoin IV is seemingly explained by flows seeking Bitcoin IV and largely ignoring Ethereum. Bitcoin volatility demand is likely linked with safe-haven flows driving spot Bitcoin outperformance vs broader crypto.
Bitcoin and Ethereum are often compared to gold and silver, and I see the closest relevant examples from traditional finance in February 2016 and March 2022, when gold IV largely outperformed silver IV. The gold-silver example isn’t a perfect comparison, but does suggest caution in making a spot move prediction based on the very low ratio of Ethereum IV to Bitcoin IV. Traders should expect some kind of an IV mean-reversion rather than make a directional spot bet.
*This communication is intended as strictly informational, and nothing herein constitutes an offer or a recommendation to buy, sell, or retain any specific product, security or investment, or to utilise or refrain from utilising any particular service. The use of the products and services referred to herein may be subject to certain limitations in specific jurisdictions. This communication does not constitute and shall under no circumstances be deemed to constitute investment advice. This communication is not intended to constitute a public offering of securities within the meaning of any applicable legislation.
