Bitcoin's falling volatility hides a risk that Wall Street models may miss

Alexander S. Blume, co-founder and CEO of Two Prime, an SEC-Registered Investment Advisor, pointed to one especially popular version of that trade, called call overwriting. Investors sell call options on bitcoin they already own, giving up some of the upside in exchange for steady income from selling the call options.

"I believe that, despite tempered volatility on the whole, the heavy increase in derivatives markets positioning allows for large moves to still occur somewhat frequently. At present, call overwriting is a highly crowded trade. When we see a move up, like the past month, it creates a short squeeze that amplifies the moves," Blume said.

A more resilient market?

The good news is that the market is absorbing these jolts better than it once did.

On Sept. 21, the day of bitcoin's latest 3-sigma jump, Paradigm facilitated a record $6.7 billion in options trades.

"This time we haven't seen or heard of any desk taking a bad hit," Quatravaux said.

"Participants are much more sophisticated than a few years ago, risk management has improved a lot, and there's more institutional money in the market, so a tough month stays a tough month," he said.

Just don't expect these wild swings to stop.

"They'll stick around. Ten years of data shows these days haven't gone away as the market matured, because macro shocks aren't going anywhere," Quatravaux said.