What Does Bitcoin's Massive Volatility Drop Mean?
Bitcoin’s volatility level has dropped by 6 points to 3.84%, a similar level to April last year, which marked the start of Bitcoin’s bull run to $12,000
As the world spins into new normals and uncertainty against the backdrop of COVID-19, is Bitcoin set to benefit from the recent COVID-19 induced market turmoil?
What Is Volatility?
Volatility is a measure of how the price of an asset varies over time and the risk of changes to an asset's value.
The Bitcoin markets can be exceptionally volatile, especially through the eyes of someone used to the more established financial markets. When the traditional markets move in a drastic fashion, they may move by 10% by a week. For Bitcoin it is not uncommon for 20% moves on individual days. And while that may sound like a lot, the fact of the matter is actually that Bitcoin's volatility has steadily decreased over its 10 year lifespan.
The Big Drop In Volatility
Bitcoin Volatility Chart courtesy of Highcharts.com
Bitcoin's value has always been volatile, but has been decreasing over time. In the period between October of 2017 and January 2018, the volatility of the price of Bitcoin reached nearly 8%. This is more than twice the volatility of Bitcoin in the 30-day period ending January 15, 2020.
Fast forward a few months to April 2020 and a week that saw Oil tumble to negative prices, Bitcoin has held its recent trading range between $6,400 and $7,400.
This means that Bitcoin market volatility has hit three-month lows, now dropping to just over 6% marking a price squeeze that could soon mean a price rise is on the way.
The big drop: what does it mean?
If we look back to April 24th 2019 when Bitcoin's volatility was at 3.47%, Bitcoin began its journey from around $5,500 to just under $13,000 by June 27th.
Looking at Bitcoin today, the current situation seems uncannily similar: at the time of writing, BTC is trading at around $7,500 while its volatility resides at around 3.84%.
Does this mean another price breakout is around the corner? According to events seen last year, as well as Technical Theory, this drop in volatility may well precede a large breakout.
“There’s currently an ongoing battle between the long term sellers and the short term buyers in Bitcoin. I am speculating that the halvening, Bitcoin’s most important supply-side event, will give buyers the needed fuel to take out key resistance”
- Austin Jacob, BitPremier founder
Why Does Volatility Occur?
One of the main reasons the markets are so volatile is due to the very limited economic size of them. At the time of writing, the total market capitalization of Bitcoin sits around $138 billion. In comparison, the combined market value of Apple is well above one trillion dollars. In other words, the value of this asset class is miniscule even compared with individual equities such as Apple.
Conclusion
The coming weeks will be telling. Will history repeat itself, meaning that the drop in volatility combined with the upcoming halvening mean a price breakout? Only time will tell, but perhaps with the ongoing Covid crisis, and many warnings of a global recession, this could see the number one crypto asset rise to new heights.
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