Market signals behind the contraction of Bitcoin volatility

The cryptocurrency market has shown an interesting divergence phenomenon after experiencing a series of macro risk events. Although Bitcoin’s price hovers around $86.62K (down 3% from the 24-hour high), the indicators reflecting decreased volatility and shrinking open interest tell a more complex story — this is not just a result of easing tariff concerns, but also a re-pricing of different risk assets by market participants.

Divergence Signals in the Derivatives Market

Volatility contraction is the most noteworthy phenomenon in the current market. Bitcoin’s 30-day implied volatility (IV) has decreased from a high of 44.3 on Wednesday to 40.62, indicating a slowdown in demand for hedging tools. Meanwhile, open interest (OI) has slightly declined by 0.34% over the past 24 hours, while the spot price has risen by 0.84% — this divergence reveals a key fact: short-term traders are actively exiting positions, locking in profits rather than establishing new directional bets.

Funding rate data further validate this trend. Most mainstream cryptocurrency trading pairs still maintain positive funding rates, reflecting a generally bullish market sentiment; however, some tokens like Axie Infinity (AXS) have negative funding rates, indicating that excessive long positioning has begun to reverse. The Bitcoin long-short ratio has risen from a low of 1.18 last week to 2.04. While this appears to show a clear bullish bias on the surface, combined with the declining volatility, it resembles a form of “dampened” optimism — the market is increasing directional bets but reducing expectations of volatility.

Token Ecosystem Divergence and Rotation

The token market is playing out a role-reversal scenario. The metaverse sector has once again become a focus of capital chasing, with Sandbox (SAND) performance evolving from an 11% increase to a new correction phase (recently -6.12%), reflecting profit-taking after rapid gains. The CoinDesk Metaverse Index (MTVS) still gained 6.58% over the same period, but its growth rate has slowed significantly compared to earlier, with a year-to-date increase of 50.8%, fully reflecting the sector’s warming expectations.

The privacy coin sector, however, remains in a prolonged slump. Dash (DASH) is currently priced at $56.05, down 4.68%; Midnight (NIGHT) at $0.06, down 1.88%; and Monero (XMR) and Zcash (ZEC) have weekly declines of 27% and -0.33% respectively (note: weekly data shows signs of significant improvement), forming a stark weak performance pattern. This persistent selling pressure suggests market doubts about the commercial prospects of privacy features, especially amid tightening regulatory environments.

The DeFi ecosystem shows rare resilience. Total Value Locked (TVL) has been steadily rising since 2023, contrasting sharply with the previous cycle’s volatility (which soared to $176 billion before falling below $50 billion), indicating that current DeFi growth is more sustainable. CoinMarketCap’s “Altcoin Season” indicator has risen from 26/100 to 29/100 the day before yesterday, driven mainly by a 2.5% increase in non-top-tier tokens like XRP and BNB, compared to Bitcoin’s 0.74% gain, demonstrating the relative strength of altcoins.

Cross-Asset Risk Pricing Changes

From a broader macro perspective, the market is adjusting asset class weights. Gold has broken through $5,500/oz and hit a new all-time high, with a single-day increase contributing approximately $16 trillion in nominal value — a massive capital flow signal. The JM Bullion Gold Fear & Greed Index shows extreme optimism, while the cryptocurrency Fear & Greed Index remains in the fear zone. This divergence reflects a pricing split between traditional safe-haven assets and high-volatility risk assets.

Bitcoin’s relative lag in this move is noteworthy. Despite long-term narratives emphasizing its “hard asset” nature, trading behavior clearly shows investors tend to prefer physical gold and silver over digital tokens when facing uncertainty. This shift suggests that market participants’ recognition of cryptocurrencies as “safe-haven assets” is still in development, with overall sentiment leaning more toward risk assets rather than defensive assets.

The Duality of Market Outlook

The current combination of declining volatility, shrinking open interest, and diverging funding rates signals that the market has entered a cautious phase. In the short term, the market has digested the uncertainty around tariff policies, providing some price support; but in the long term, the dulling of derivatives indicators hints at an increasing likelihood of significant volatility — declining volatility often precedes large swings. Investors should carefully adjust their positions and risk management strategies amid accelerating asset rotation and widening cross-category pricing differentials.