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While BTC previously traded in a tight range, the low level of realized volatility broke this week when the price briefly fell to $62K.
The move coincided with a weakening in risk appetite across broader markets, and options pricing responded quickly with a strong increase in demand for downside protection.
However, a sharp correction back to the $68K levels at the time of writing, after a brief stint at the $70k handle, lost in the sell-off has not seen the same response in volatility markets.
While the skew of volatility smiles towards OTM puts has recovered, the snap back higher did not see ATM implied volatility levels jump to the same extremes. While traders are now pricing in larger near-term moves, with one-week implied volatility jumping, the front end of the volatility curve is only mildly inverted.
The bearish tone is not limited to options markets.
Spot Bitcoin ETFs have now seen net outflows for four straight months
Bitcoin remains on track for a fifth consecutive monthly decline, a pattern last seen in the bear market that followed the 2018 ICO cycle.
Ethereum is showing a similar setup, with spot ETH ETFs also on pace for a fourth month of outflows, the longest stretch since their launch in July 2024.
Retail sentiment and leverage indicators are also weak. Searches for “Bitcoin is going to zero” have surged to an extreme, above the peak seen during the 2022 bear market.
Meanwhile, perpetual futures open interest has continued to decline since the 10/10 liquidation event, suggesting traders remain reluctant to rebuild leveraged exposure.
Block Scholes’ Risk Appetite Index measures the level of euphoria (above 1) or panic (below -1) in the spot market. Momentum in this index shows a strong relationship to spot returns.
The past two weeks of sideways consolidation were sharply interrupted this week as BTC fell to $62K. Risk appetite dampened across both crypto markets and broader macro asset classes, after President Trump vowed not to let the Supreme Court’s ruling on tariffs affect his signature economic policy. However, the last 24 hours have seen BTC recover to around the $68K level that it last held in a single-minded rally higher.
While the initial sharp breakout to the downside in spot price resulted in options traders pricing optionality higher, the recovery of the lost spot levels has not. BTC’s term structure of volatility is still in a mild inversion after 7-day ATM IV jumped a full 10 percentage points to 60%, coinciding with a nearly 10-point jump in 7-day delivered volatility, but short-dated optionality is still far lower on the way up in spot than it was on the way down.
That quick repricing in implied volatility was largely driven by traders willing to pay a higher premium for insurance against further downside risk.
While options prices have not yet fallen to their previous levels, the correction to the upside has not spiked options pricing in the same way.
In short, options prices remain lower than during the height of the sell-off.
The impact of the recovery rally is more obvious in its impact on the skew of volatility smiles. In response to the sell-off on Feb 23, 2026, the relative preference for put options rather than call options fell back to the lows Feb 6 selloff, when BTC last traded at its 2026 lower bound.
However, since the recovery of the $68K level, put options no longer trade with as much of an extreme premium as they did.
This does not mean that options markets are now bullish – far from it.
Derivatives markets are still (in aggregate) looking for protection against a further selloff.
But while this slightly heavier positioning in short positions is bearish, it could see some traders caught offside and forced to close bearish positions in the case that the current rally in spot continues.