Tail Risk in the Crypto Market: What You Need to Know
Tail risk refers to the risk of an asset moving three standard deviations from its current price on the back of a rare event. In the crypto market, traders are particularly concerned about tail risk in bitcoin (BTC). Despite BTC’s recent stability around $26,000, there is still a fear of a significant price move. The butterfly index, which measures the demand for out-of-the-money (OTM) options, indicates that traders are pricing in tail risk.
- The butterfly index gauges the relative richness of OTM call options and lower strike put options.
- An elevated index indicates stronger demand for OTM options, signaling traders’ fear of tail risk.
- Call options give the right to buy, while put options give the right to sell.
- Demand for OTM calls and puts rises when traders anticipate a large price move.
- The butterfly index remains elevated, suggesting lingering fears of an outsized move in bitcoin’s price.
This pricing for tail risk aligns with the macroeconomic uncertainty in the market. The Federal Reserve’s commitment to hitting the 2% inflation target and maintaining tight monetary policy has led to higher bond yields, which weigh over risk assets like cryptocurrencies. Traders anticipate that the U.S. nonfarm payrolls report will further impact tail risk in the market. As a crypto reader, it’s important to be aware of tail risk and how it can affect bitcoin’s price.
Hot Take:
Despite BTC’s recent stability, the lingering fear of tail risk indicates that traders are still cautious about a potential significant price move. The pricing for tail risk aligns with the macroeconomic uncertainty and the Federal Reserve’s tight monetary policy. As a crypto reader, it’s essential to stay informed about tail risk and its potential impact on bitcoin and the overall crypto market.
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