Silvergate Contagion Increases, Bitcoin Showing Heavy Downside Put Skew

The worsening macroeconomic outlook has prompted Silvergate, a bank that previously supported cryptocurrency, to cease operations. This decision has caused concern among digital-asset investors, leading to a surge in demand for derivatives that offer protection against price declines in major tokens. 

As I write this, the 30-day bitcoin skew, which measures the difference in implied volatility and demand for cheap out-of-the-money calls and put options expiring in four weeks, indicates the highest bearish bias in put options in over two months. 

This suggests that investors are purchasing put options to hedge their long spot or futures positions or to profit from potential bearish price movements, indicating their concern about a further drop in the bitcoin price.

And this concern is also creating contagion in the banking sector, which is currently under huge downward pressure. 

Given the recent slide in the bitcoin price, the increase in demand for put options seems reasonable. This is due to the fact that the market depth for U.S. dollar trading pairs has worsened, which means that even a small sell order can result in a disproportionate drop in price. The term “depth” refers to the market’s capacity to handle significant buy and sell orders while maintaining stable prices.

The big “higher low” in Bitcoin should be here with us shortly!