Bitcoin Volatility Exposes Divergence Between Prediction and Derivatives Markets
Options markets signaled rising tail risk as liquidations mounted, yet January prediction contracts adjusted only slowly as bitcoin’s volatility unfolded.
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Bitcoin’s recent slide highlighted a familiar pattern: probability gauges drifted lower while derivatives traders rushed for protection. Open interest in $75,000 put options surged, and hundreds of millions of dollars in long positions were liquidated, but prediction markets showed only a gradual erosion of optimism.
Throughout January, Polymarket contracts tied to higher bitcoin price targets softened steadily, yet never reflected the abrupt volatility that wiped out leveraged positions in a single day.
This disconnect stems from structural differences. Prediction markets are focused on end states: a contract asking whether bitcoin will finish the month above a certain level rewards traders only if the final price meets the target. Short-term shocks—even violent ones—matter less if a rebound is still plausible before expiry.
Galaxy Digital research has noted that directional prediction markets condense complex beliefs into binary outcomes, often overstating consensus and masking magnitude and tail risk.
Derivatives desks operate differently. Deribit data shows open interest in $75,000 puts swelling nearly to the level of the $100,000 call strike within days. This doesn’t necessarily indicate a bearish turn—rather, traders were buying insurance as volatility expectations jumped and downside risk expanded.
The impact of liquidations made the divergence stark. Over $500 million in leveraged long positions were forcibly closed in 24 hours—during a thin weekend liquidity period—primarily on perpetual futures platforms where margin dynamics amplify price swings. For a leveraged fund, such moves are urgent. For a month-end prediction contract, they only matter if they alter beliefs about the final outcome.
QCP’s 2025 year-end review describes crypto as operating at two speeds, where structural optimism coexists with sudden, leverage-driven drawdowns. Bitcoin didn’t crash below $75,000, but it also didn’t climb to levels prediction markets implied. The final outcome revealed how differently these markets interpret the same underlying risk.
Market Movements
BTC: Traded just under $80,000 after a week of sharp volatility that flushed leveraged longs and pushed traders toward downside protection rather than new upside bets.
ETH: Hovered near $2,300, extending its multi-week slide as risk appetite remained muted.
Gold: Traded around $4,750 per ounce, down sharply after testing $5,300 earlier in the week.
Nikkei 225: Inched higher Monday amid mixed Asia-Pacific trading. China’s January factory activity expanded at its fastest pace since October, while South Korean and Hong Kong equities fell, and gold continued its decline.
Elsewhere in Crypto
- Crypto exchanges sanctioned alongside Iranian officials in Trump administration’s Iran crackdown (The Block)
- Ethereum security upgrade: Ethereum Foundation prioritizes post-quantum security with leanVM and PQ signatures (CoinDesk)
