Bitcoin options market remains fearful of USDC volatility

The Circle-issued USDC stablecoin regained its dollar peg, recovering from the Silicon Valley Bank-induced chaos over the weekend that saw its price plunge to $0.90 on major exchanges.

The re-pegging has yet to calm nerves in bitcoin’s derivatives market, where Deribit-listed options contracts are settled in BTC trading at a higher implied volatility (IV) premium than Bybit’s contracts paid in USDC.

That’s a sign of investor preference for contracts settled in native cryptocurrencies, according to crypto derivatives research firm Block Scholes.

“While USDC has now restored its bond to trade at $0.99, is [positive] The Deribit option-to-ByBit option implied volatility spread persists,” Andrew Melville, research analyst at crypto derivatives analytics firm Block Scholes, wrote in Tuesday’s research note.

“The discrepancy is present across the term structure and is most dramatic at longer tenors [longer duration options]. This suggests that the market is still valuing options that lay in the underlying (rather than USDC) at a relative premium due to continued concern about a further dip, Melville added.

Options are derivative contracts that give the buyer the right, but not the obligation, to buy the underlying asset at a predetermined price on or before a specific date. A call option gives the right to buy, while a put option gives the right to sell.

Implied volatility (IV) refers to the options market’s expectations of price turbulence over a specific period. Higher implied volatility represents increased demand and prices for options. Volatility term structure is the graphical representation of how options on the same underlying asset show different implied volatilities over different expiration months.

Bybit and Deribit calculate the payout or profit/loss from the options trade, referring to the dollar value of the underlying asset (BTC). But at Deribit, the actual settlement is paid in BTC, while Bybit uses USDC. Settlement refers to resolving the contract between trading parties through the exchange of cash or actual underlying asset.

It exposes Bybit-based options traders to volatility in USDC. Also, a potential stablecoin crash would render Bybit’s options worthless.

“The short depeg of USDC tokens at $0.90 meant that options on Bybit would be settled at around 90% of their stated dollar payout. The market was slow to price this difference, and briefly continued to price both option types at the same level of implied volatility,” Melville said.

The spread between the seven-day IV derived from Deribit and Bybit-listed options widened over the weekend and has remained high since then.

“Although the decoupling crisis between USDC and USD has been temporarily lifted, investors are reluctant to take systemic risk, so [options] buyers will seek lower premiums in the options on the other side,” Griffin Ardern, volatility trader at crypto-asset management firm Blofin, told CoinDesk.