A number of analysts have come forward in the past few weeks with differing views on whether Bitcoin’s block reward halving is priced in or not. According to a thread by Skew Markets on Twitter, a clear pattern is forming in BTC’s options market showing the May 2020 halving, aka the halvening, may be priced in or else the crypto market is inefficient.
The third side of the coin
The current raging debate across the BTC community lies in two major philosophies; he stock-to-flow model and the (in)efficiency of the BTC market (EMH hypothesis). However, Skew seems to have unlocked a new theory signaling the current price of BTC has already incorporated the May 2020 halving – “The halving through the options market”.
One thing that all camps seem to agree on is there should be some volatility in price leading to the halving given the natural supply of Bitcoin will be reduced by half. However according to the options theory the ‘kink’ in price volatility during the halving event will not be as significant as thought of by BTC bulls as signaled by the low implied volatility of options maturing in Jun 2020.
The implied volatility term structure on BTC options
The term structure for implied volatility is the spread of volatility over time or the change in volatility from one expiration period to the next. This metric is a good proxy to show the level of volatility expected at time of the option expiration giving a clear view of what the market will look like during that time.
Looking at traditional markets, major events (such as an M&A or report earnings) preceding the option expiration date cause a certain ‘kink’ to the term structure of the options signaling a possible major move in the price once the event happens.
“Using forward variance, one can even calculate fairly precisely the implied move on the day of the event, based on a number of assumptions. This means traders can trade the event’s “implied move” by using option calendar spreads.” – Skewdotcom on Twitter
No kink in BTC
The volatility on BTC options that expire around the same time as the halvening, i.e. June 2020 options, signals the event is already priced in. Looking at the charts “no kink” is forming on the implied volatility term structure for the June 2020 options. The unmoved term structure shows the market does not expect any unusual increase in volatility during the halving event.
The kink witnessed on the term structure of volatility corresponds to the March 2020 options which means the market is expecting a rise in volatility in the months leading to the halving.
7/ The kink appearing in the above chart actually corresponds to the Mar20 expiry, meaning that the options market anticipate heightened relative volatility in the month of March 2020, as opposed to Q2 2020 ?.
— skew (@skewdotcom) January 6, 2020
So is BTC priced in?
Well according to the Bitcoin options volatility term structure model, the price of BTC caters for the halving as the market does not expect large movements in volatility following the event (i.e. Jun 2020). If not, then the BTC options market proves to be very inefficient and an arbitrage opportunity may open up for traders and investors.