How to use Implied Volatility Index to analyze Bitcoin▮ Introduction
Bitcoin is known for its price volatility. Analyzing the price chart alone is often not enough to make buy and sell decisions.
Implied volatility indexes such as DERIBIT:DVOL and VOLMEX:BVIV can complement traditional technical analysis by providing insights into market sentiment and expectations.
▮ Understanding DVOL/BVIV
DVOL and BVIV measure the expected implied volatility of Bitcoin over the next 30 days, derived from real-time call and put options.
DVOL is calculated by Deribit, the world's largest Bitcoin and Ether options exchange.
BVIV is calculated by Volmex Finance; the data is extracted from exchanges (currently Deribit and OKX), and then combined into a single set.
* In addition to Bitcoin, it is possible to analyze Ethereum-specific instruments through the ticks DERIBIT:ETHDVOL and VOLMEX:EVIV, whose line of reasoning is the same.
▮ Interpreting the chart
🔶 High DVOL/BVIV values indicate that the market expects greater volatility in the next 30 days. This is usually associated with uncertainty, fear, or expected major events.
🔶 The index does not indicate the direction of the price, but rather whether volatility will increase or decrease.
🔶 Low values indicate an expectation of lower volatility and are usually associated with calmer and more optimistic markets.
🔶 To get an idea of the expected daily movement of Bitcoin, simply divide the DVOL value by 20. For example, a DVOL of 100 indicates an expected daily movement of 5%.
🔶 Divergences between the price of Bitcoin and DVOL/BVIV can signal inflection points.
🔶 Price rising with a drop in DVOL/BVIV may indicate exhaustion and a potential top.
🔶 Price falling with a drop in DVOL/BVIV may indicate exhaustion and a potential bottom.
▮ Example
The price of BTC here is at the top in white.
The DVOL and the RSI of DVOL are both in red.
The reason I put the RSI here is that it is easier to analyze DVOL, since the values are in a fixed range, therefore easier to interpret.
On March 25, 2022, the RSI shows a contracted value of 30, that is, low implied volatility. This foreshadows a period of calm that precedes a period of agitation.
In this case, the “agitation” soon materializes in a period of price decline.
When the RSI then reaches the upper limit range, at 83 (on May 12, 2022), a peak in volatility is characterized.
Then, after that, it begins to decrease. This decrease in volatility in DVOL corroborates the moment of Bitcoin’s lateralization within the orange box.
▮ Conclusion
Although DVOL and BVIV should not be used in isolation, they can be valuable tools for confirming price chart signals and anticipating major movements.
Incorporating implied volatility analysis into your strategy, can improve the timing of entries/exits and help manage risk.
⚠️ But remember:
Just because a strategy worked in the past does not mean it will work forever.
Past profitability is no guarantee of future profitability.
Do your own analysis and risk management.
DVOL
BTCUSD: Targeting $146,387.66 According to Volatility IndexesBVOL (Realized BTC Volatility) has a huge gap implying an eventual 758% Upside within the index while at the sametime DVOL (Implied BTC Volatility) has a Bearish 3 Line Strike which is a very Bullish Pattern implying upside in it aswell. The last time BVOL rallied by 615% it was coupled with BTC itself going up about 610%. Applying that same logic to the current price action; If BVOL goes up 758% then BTC will go up about 750% from where it was which would take us all the way up to a macro target of about $146,387.66
BTCUSD: 0.618 Retrace Likely Before Continuation HigherBitcoin has Formed a Peak during after a 5th wave while trading at the top of a Broadening Consolidation Structure and showing Bearish Divergences. If things were to go as one would expect, I would think BTC should have around a 20% pullback to about 23k which would take us back to the POC and would be a 61.8% Retrace of the Local Low to High. If we can then begin a rally from the 61.8% retrace, it will then be a Potential Partial Decline which would almost guarantee that BTC Bullishly Breaks out of the Broadening Pattern upon making contact with the upper trend line. If this were to happen I would say BTC could very easily see 40k but I also think that it's very likely that this will be the pivotal point that begins Bitcoin's greater rally up to $60,000 then $146,387 as can be projected via the volatility trends that can be seen in this chart below:
