CRYPTO

Binance CEO expects ‘very high volatility’ in crypto. Here’s how to trade it


Volatility is a complex statistical measure commonly used by traders and investors. Those unfamiliar with it will probably blame analysts for using some special ‘stand’ word. However, a recent comment from Chang Peng Zhao, founder of Binance Exchange, shows that most of the time people are ignorant of what is meant by instability.

This is not the first time that CZ has made a wrong guess In May, CZ said the volatility was “not unique to crypto,” although multiple sources, including Cointelegraph, showed that with the exception of Tesla, no S&P 500 stock matched 70% of the annual volatility of Bitcoin (BTC).

So what is volatility?

Perceived (or historical) volatility measures how large and higher daily price fluctuations indicate that prices can fluctuate widely on both sides over time.

This indicator may sound retrograde, but presents a more significant risk of explosive action during low volatility. This is partly due to the perceived instability being a retrograde indicator. During solitary confinement, traders tend to over-leverage, which creates large liquidity during sudden price changes.

Bitcoin realizes 50-day volatility. Source: Tradingview

The above data show an average 50-day volatility of 74% in the last two years. Historically, the index tends to accelerate as it moves above 80%, but there is no guarantee that such a move will occur. The data for February and April 2017 present a counter-argument to this thesis.

Instability does not distinguish the bull and bear market because it exclusively measures the perfect daily oscillation. In addition, in itself, a quiet volatility period is not an indicator of an impending dump.

What if CZ knows something we don’t know?

Considering how well connected the founders of the world’s largest crypto exchanges are, there is always a possibility that CZ may have some insider information but if a person is sure about an upcoming event, chances are they will probably know whether the effect is positive or negative. . Again, expecting “high volatility” for the “next few months” does not indicate which side one has confidence in.

Let’s say he was right, and cryptocurrency is about to break the 100% annual level. There is an alternative strategy that adapts to this scenario and allows investors to benefit from a stronger move on both sides.

Reverse (short) Iron Butterfly is a limited risk, limited profit alternative trading strategy. It is important to remember that options have a specific expiration date; Therefore, price increases must occur within the defined period.

Profit / Loss Account. Source: Deribit Position Builder

The above prices were taken on October 25, with Bitcoin trading at around 63,000. All of the options listed are due to expire on December 31, but this strategy can also be used using a different deadline.

The proposed bullish strategy includes selling 1.23 BTC contracts for $ 52,000 put options as well as selling 0.92 call options with a $ 80,000 strike. To finalize the trade, one must purchase 1.15 contracts of the $ 64,000 call option and another 1.0 contract of the $ 64,000 put option.

Although this call option gives the buyer the right to acquire an asset, the contract seller receives a (potential) negative exposure. To fully protect oneself from market volatility, one has to deposit 0.174 BTC (about $ 11,000), which represents the maximum loss to investors.

The risk of being rewarded is sketchy, so the trader needs conviction

For this investor’s profit, the price of Bitcoin must be below $ 54,400 (14% lower) or above $ 75,500 (19% higher) on December 31, 2021. The theoretical risk-reward is not good because the maximum payout is 0.056 BTC and the potential loss is 3 times that amount.

However, if a trader is convinced that the volatility is right around the corner, it seems possible to move% 63,000 to 20% in 66 days. Traders should keep in mind that investors can return the operation before the option expires, especially after a strong bitcoin price change. All you have to do is buy back the 2 sold options and sell the other 2 that were bought earlier.

Opinions and opinions expressed here are only those Author And does not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should do your own research when making decisions.