Veteran equity market participants are acutely aware that market corrections typically coincide with surges in volatility indicators like the VIX index, which measures anticipated market turbulence. However, this phenomenon appears less pronounced within the bitcoin market, despite cryptocurrencies often moving in tandem with technology stocks.

As bitcoin’s value has receded by 10% from its peak above $70,000 over the past month, Deribit’s bitcoin volatility index (DVOL) — a metric derived from options to gauge expected price fluctuations over the ensuing 30 days — has decreased from an annualized 53% to 42%, its lowest point since early February, according to TradingView.

Implied volatility is intrinsically linked to the demand for options or derivative contracts that provide the buyer with the right to purchase or sell the underlying asset at a predetermined future price. A call option grants the right to buy, whereas a put option bestows the right to sell.

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The decline in the DVOL amidst the price correction indicates a tranquil market milieu where investors exhibit less propensity for panic or hedging through protective puts. Furthermore, bitcoin’s retreat has been measured and orderly, as opposed to a rapid plunge that typically drives investors to acquire options to capitalize on volatility spikes.

“It’s because BTC has been languishing off the highs, confined to a range-bound market with subdued realized volatility,” stated David Brickell, head of international distribution at the Toronto-based crypto platform FRNT Financial, in an interview with CoinDesk. “There’s a palpable lack of enthusiasm for buying volatility during the summer months, compounded by a structural tendency of overwriters selling volatility. In the absence of significant demand, implied volatility trends lower.”

Volatility selling remains a favored strategy among crypto investors, where they sell or write options in a stagnant market, thereby reducing implied volatility. The seller collects a premium for committing to compensate the buyer in the event of significant price movements. Commonly, this involves writing call options atop spot market holdings.

According to Brickell, a resurgence in BTC’s price above $70,000 will likely rekindle the demand for options and elevate the DVOL implied volatility index. Throughout this bullish phase, BTC’s price has shown a positive correlation with the DVOL index.

“We’ll probably need to see BTC approaching the upper bounds of its range and posing a threat to break higher to overcome this ‘volatility lethargy’,” Brickell concluded.