Block Scholes x Bybit May Volatility Review: ETH-BTC volatility reaches a five-year high as ETH plays catch-up

Key Insights:

• ETH options traded at historically high volatility premiums relative to BTC in May 2025, driven by ETH’s significantly higher realized volatility amid a sharp spot price rally. The ETH-to-BTC implied volatility ratio reached a nearly five-year high (over 2x for short-dated tenors).

• This extreme volatility ratio came as BTC’s realized volatility reached unexpectedly low levels, breaking a long-standing volatility floor and contributing significantly to the divergence with ETH options markets.

• The term structure of volatility for ETH and BTC diverged sharply, with ETH volatility displaying a persistent inversion — shorter-dated options priced higher than longer-dated options — reflecting immediate market uncertainty. In contrast, BTC’s term structure remained relatively flat.

A Dislocation for the records

May 2025 was characterized by the same erratic trade policy behavior that defined the months that came before it. On May 5, 2025, US President Trump authorized the Department of Commerce and the Office of the United States Trade Representative to place a 100% tariff "on any and all movies coming into our country that are produced in foreign lands." Toward the end of the month, Trump threatened to impose a 50% tariff on all imported goods from the European Union and warned of 25% levies on Apple and Samsung products. However, over the space of a weekend, those threats on the EU were soon delayed until July 9. 

In addition, May didn’t just consist of a bombardment of tariff threats, as the US administration reached its first trade agreement with a major partner in the form of a US-UK trade deal, and later negotiated a temporary trade truce with one of its toughest partners, China. US equity markets and crypto markets were both engulfed by the subsequent risk-on environment, bolstered further by President Trump, who said, “You better go out and buy stocks now. This is going to be numbers that nobody’s ever seen before.”

Figure 1. BTC spot price (orange, left-hand axis) and ETH spot price (purple, right-hand axis). Source: Block Scholes 

The rally in crypto markets in May found a particular beneficiary in ETH, which had struggled in relative terms for much of the current crypto cycle. The blockchain’s native ETH token surged by more than 50% from May 8–15, 2025, far outperforming BTC. With these moves in spot, a major dislocation emerged between ETH’s and BTC’s at-the-money implied volatility levels. 

A tale of diverging volatility

First of all, what exactly is the dislocation?

An option’s implied volatility is the level of volatility that the market expects to be realized over the lifetime of a given option until expiration. The chart below plots the implied volatility for ETH options at constant tenors of 7, 14, 30 and 90 days, divided by BTC at-the-money implied volatility at the same tenors, and can therefore be thought of as a visualization of the ratio of ETH’s to BTC’s implied volatility over time at equivalent constant tenors. 

Figure 2. Ratio of ETH at-the-money options’ implied volatility to BTC at-the-money options’ implied volatility at several constant tenors. Source: Block Scholes

At the start of May 2025, the ratio for ETH’s 7-day tenor was just under 1.5, meaning that 7-day ETH options implied a volatility that was 1.5 times higher than BTC’s implied volatility. Equally important, the longer-tenor 90-day option ratio was at 1.35. ETH options carrying a volatility premium to their BTC counterparts is nothing new — the dotted line marked at a value of 1 indicates when ETH volatility is equal to BTC volatility for any select tenor. A ratio below 1 indicates the rarer case in which BTC options trade with higher volatility than ETH’s. Indeed, what we find is that, since as far back as 2020, ETH volatility has mostly been at the same levels for BTC volatility, if not higher.

Figure 3. Ratio of ETH at-the-money options’ implied volatility to BTC at-the-money options’ implied volatility at several constant tenors. Source: Block Scholes

However, in May 2025, the ETH/BTC implied volatility ratio surged above 2 — a level it hasn’t attained in almost five years. Then, on May 16, 2025, ETH 7-day options traded with an implied volatility that was 2.16 times higher than that of 7-day BTC options. Deconstructing the terms of the ratio, we find that the peak in ETH/ BTC implied volatility at the 7-day tenor was due to BTC’s at-the-money implied volatility reaching its lowest level for the entire month on the same day. 

Figure 4. BTC at-the-money options’ implied volatility at several constant tenors. Source: Block Scholes

In fact, options markets had priced in their lowest levels of implied volatility for BTC not just for the month of May, but since October 2023. Thus, they breached the 35% mark to the downside, which we’ve previously highlighted to be a floor for forward-looking volatility expectations for over 19 months. 

Figure 5. BTC at-the-money options’ implied volatility at several constant tenors. Source: Block Scholes

Comparatively, volatility expectations for short-tenor ETH options had dropped off from their May 10 highs of up to 88%, falling to 69%. This is a level that (relative to ETH’s historical distribution of implied volatility) is neither incredibly high (given that ETH’s ATM IV peaked in March 2020 at 336%) nor historically low (going back to September 2023’s implied volatility of just 17%). 

Figure 6. ETH at-the-money options’ implied volatility at several constant tenors. Source: Block Scholes

Thus, it’s a surprisingly low level of volatility priced in by BTC options traders and a consistently elevated (but not extreme) ETH implied volatility that has caused the ratio to reach ATH levels. That divergence is clear in the 30-day tenor of both assets, which shows the relative level of volatility between BTC’s and ETH’s 30-day options at its widest spread since mid-2022.

Figure 7. BTC (green) and ETH (pink) at-the-money options’ implied volatility at the 30-day tenor. Source: Block Scholes

Does realized volatility explain the divergence?

At-the-money implied volatility reflects market participants’ forward-looking expectations. What we’ve found is that, for most of May, traders didn’t just expect ETH to trade with a higher volatility in the next 7, 14, 30 and 90 days relative to BTC; the divergence in those levels of volatility rose to near-record levels. One way we can attempt to justify the cause of that divergence is to look at realized volatility — a backward-looking measure that quantifies the volatility of price movements that have already happened. 

Figure 8. BTC (orange) and ETH (purple) 7-day realized volatility (on hourly returns). Source: Block Scholes

For most of their shared history, realized volatility for ETH has typically been higher than for BTC. This is not a unique dynamic between only these two assets, however. Tokens with smaller market caps often trade with higher volatility and amplify the moves in BTC, both on the way up and the way down. 

Figure 9. Ratio of ETH/ BTC 7-day realized volatility (white) and BTC (orange) and ETH (purple) 7-day realized volatility (on hourly returns). Source: Block Scholes

However, the ratio between ETH’s and BTC’s 7-day realized volatilities reached an ATH on May 15, 2025, just one day before the peak in the equivalent implied volatility ratio. Therefore, if traders recognized that ETH’s realized volatility was significantly higher than BTC’s, an expectation for that trend to continue would have translated into higher levels of implied volatility. 

However, this phenomenon didn’t just begin in May 2025. While ETH’s volatility has historically been higher than BTC’s, the ratio between the two has been increasing relatively consistently since July 2024, both when spot prices have rallied and during periods of market stress. 

Figure 10. Ratio of ETH/ BTC 7-day realized volatility. Source: Block Scholes

We can explain the most recent disparity between the realized volatility of both assets in May 2025 by turning to their spot markets. In our report on Ethereum’s recent breakout, we marked the fact that ETH’s rally beginning May 8, 2025 not only coincided with the successful rollout of the Ethereum network’s Pectra upgrade, but also with US President Trump announcing the US-UK trade deal on day 30 of his 90-day tariff pause. Markets were also boosted by Trump’s foreshadowing that he would reduce levies against China — which he did only one week later. On May 8, 2025, ETH rallied over 23%, its largest single-day gain since May 2021, outperforming most of the crypto market. That rally extended into the middle of the month, by which time ETH was up more than 50% over the start of the month.

Figure 11. Spot returns of BTC (orange) and ETH (purple) normalized from May 1, 2025. Source: Block Scholes

BTC also benefited from the increased appetite for risk across financial markets, rallying by more than 10% within days and straight through $100K for the first time since early February 2025. However, the move was minuscule next to ETH’s outperformance and, despite BTC coming within inches of its January ATH, both realized volatility and the response from options markets in terms of implied volatility were muted. 

Despite ETH's strong performance in May, it’s still trading more than 50% below its January 2025 levels and its all-time high of $4.8K in November 2021.

Figure 12. Spot returns of BTC (orange) and ETH (purple) normalized from Jan 1, 2025. Source: Block Scholes

Term structure dislocation 

While ETH’s implied volatility level is far higher than BTC’s, there’s also a dislocation between the respective term structures of volatility of both assets. While ETH’s volatility has generally been equal to (or some multiple above) BTC’s at each tenor for most of their history, it’s also apparent that the ratio of ETH volatility to BTC volatility has often been consistent across the term structure. Take September 2024, for example, when ETH’s implied volatility traded at 1.1 times that of BTC’s at equivalent tenors across the term structure.

Figure 13. Ratio of ETH at-the-money options’ implied volatility to BTC at-the-money options’ implied volatility at several constant tenors. Source: Block Scholes

At the start of May, however, the ratio at different tenors began to diverge. The 7-day ratio of IV registered a value of 1.49, and for the longer-tenor 90-day tenor was slightly lower at 1.35. By the middle of the month, ETH’s 7-day options were trading from 1.8–2x as much volatility as 7-day BTC options, despite the 90-day tenor ratio increasing only slightly to 1.4. 

The extra implied volatility at short tenors in ETH was the result of an inversion of the term structure (whereby short-tenor implied volatility trades at a higher level than that at longer tenors). The chart above shows that, while historically, BTC’s and ETH’s term structures have held similar shapes, ETH’s term structure has been persistently inverted in contrast to BTC’s since early April, and even to the end of March.

Figure 14. Ratio of ETH (blue) and BTC (orange) 7-day options’ implied volatility and 90-day options’ implied volatility. Source: Block Scholes

In May, we saw a major inversion in ETH’s term structure. At the same time, and for the first time this year, BTC’s volatility term structure remained between a flat shape and an upward-sloping positive curve, though it did not invert meaningfully. 

Looking at a longer history of this relationship, it becomes apparent that what happened in May is quite unusual. Throughout the month, ETH short-tenor options continuously traded with a volatility premium to long-tenor options, an inversion that almost unequivocally was not mirrored in BTC options.

Figure 15. Ratio of ETH (blue) and BTC (orange) 7-day options’ implied volatility and 90-day options’ implied volatility. Source: Block Scholes

Therefore, not only was ETH’s IV outright higher than BTC’s, but this divergence in volatility was occurring at a much higher inversion of the term structure relative to BTC at the same time. Is this something that we would expect? 

The relationship between volatility levels and inversion

Figure 16. Ratio of ETH (blue, left axis) 7-day options’ implied volatility and 90-day options’ implied volatility and ETH 7-day realized volatility on hourly returns (purple, right axis). Source: Block Scholes

The above chart plots the ratio of ETH’s 7-day IV (against 90-day IV) on the left axis with ETH’s 7-day realized volatility on the right axis. Typically, higher levels of realized volatility are often accompanied by a significant term structure inversion (that is, a ratio above 1 on the left axis). We see large inversions to ETH’s term structure when realized volatility spikes in response to moves in the spot market. 

Figure 17. Ratio of BTC (orange, left axis) 7-day options’ implied volatility and 90-day options’ implied volatility and BTC 7-day realized volatility on hourly returns (white, right axis). Source: Block Scholes

We also see the same for BTC. However, as we’ve identified, realized volatility for BTC was low in May — in fact, far too low to coincide with an inversion in the term structure, which has often occurred when realized volatility is upward of 75%. Therefore, the dislocation in the term structure is also a result of BTC’s realized volatility remaining low, while ETH’s realized volatility was much higher. 

Conclusion

The rally in crypto markets in May 2025, in which ETH strongly outperformed BTC, triggered one of the sharpest divergences in implied volatility between the two crypto majors that we’ve seen for years. While it is common for ETH options to trade at a volatility premium to BTC, the magnitude and persistence of the divergence in May — both in outright implied volatility and in the shape of the term structures — is unusual.

This dynamic can be at least partly explained by the pronounced divergence in realized volatility between the two assets. ETH’s spot market rally, which coincided with the Pectra upgrade Mainnet rollout and a renewed wave of macro optimism around trade policy developments, resulted in a surge in short-term realized volatility to levels that are typically accompanied by an inversion in the term structure of volatility. BTC also benefited from the market rally, though its moves were far more muted. 

However, options markets are priced for a trend of higher volatility in ETH than BTC. Furthermore, the dislocation is even stronger at shorter tenors, as ETH’s term structure continues to invert while BTC’s remains stubbornly flat.