Derive Predictions Update: May 6th 2025
Implied Volatility Falls Post-Tariff Chaos, Market Sentiment Shifts
May 6, 2025 by Dr. Sean Dawson
The crypto market is showing signs of settling after a month of intense volatility. Following a surge in implied volatility driven by external factors like Trump’s tariffs, both BTC and ETH have seen their volatility levels drop, with sentiment shifting towards a more neutral outlook. But with key events like the Federal Reserve's meeting and Ethereum's upcoming Pectra upgrade on the horizon, the market remains primed for potential shifts. Here’s what to watch for as we head into May.
Implied Volatility Drops After Tariff Chaos
April began with a significant surge in implied volatility (IV) for both BTC and ETH, fueled by the market’s reaction to Trump’s tariffs. BTC’s 7-day implied volatility spiked to a monthly high of 89%, while ETH reached a high of nearly 125%. However, volatility has since decreased, with BTC IV now sitting at 43% and ETH at 62%.
BTC 7-day IV
ETH 7-day IV
Short-Term Sentiment Shifts to Neutral
Sentiment, as measured by the 25 delta skew, had been overwhelmingly negative during the first half of April driven by tariff chaos, reflecting heightened demand for downside protection. The skew for BTC was notably negative at around -20%, but it has since recovered to +2%, indicating a shift toward a more neutral market outlook, at least for the short-term.
Price Predictions
Looking ahead to the end of May, the market is predicting a 28% chance of BTC rising above $100K and an 18% chance of it dropping below $84K. For ETH, there is a 25% chance of it exceeding $2K while there’s an 11% chance of ETH falling below $1.5K.
Longer term, there’s only a 10% chance of BTC reaching over $160K and a 17% chance of it falling below $65K by the end of the year. While ETH has a 17% chance it will reach above $3K and a 12% chance of ETH dropping under $1K by the year’s end.
Traders Capitalize on Cheap Leverage and Hedge Against Downside
With volatility levels remaining unusually low, option traders are seizing the opportunity to buy cheap leverage for BTC. We’ve seen significant buying of out-of-the-money calls for BTC at $110K and $115K strikes, indicating traders are gearing up for a potentially volatile month.
At the same time, there’s evidence of downside protection as traders are also purchasing puts at $82K, $78K, and $76K strikes, likely due to concerns over an Federal Reserve board meeting that could lead to no rate cuts – or worse, hikes.
With critical events ahead, such as the FOMC meeting and the launch of ETH's Pectra upgrade, the market is positioning for uncertainty.