Bitcoin Volatility is at the Lowest it Has Been in a While

Bitcoin’s Volatility is Decreasing, What Can That Tell Us?

Bitcoin’s volatility is generally at the lowest it has been in a while. Each failed rally of 2018 has resulted in less volume and less volatility.

This is easy to see on a daily or 4 hr chart (try using Bitstamp on TradingView, you have to type BTCUSD and pick the Bitstamp data; you can also toggle between different time frames in TradingView).

Essentially less volatility means less sharp upward and downward movements, thus smaller “candles.”  You can see that there was a lot of large candles in late 2017 – early 2018, and lots of price action, and that each failed rally since has produced smaller and smaller movements.

This is the same sort of thing that happened in 2014, and looking back over crypto’s history we can see MANY instances of the same sort of thing. In none of those instances was crypto dead, instead it was just somewhere in between more downside and the next rally.

This pattern is so common, not just in crypto but with any asset, it may just be typical behavior for the popped side of an economic bubble that has been inflated via speculation (you get flatness and accumulation, then a ramp up, then volatility on the way down with some distribution, then that volatility decreases as the price grinds down or attempts to rally, then you see flatness again, then it all repeats at some point).

That may sound good or bad to you, but I don’t think it is either. It is more like a natural response to what has occurred that may act as an indicator of where we are at and what may be coming.

With that noted, let’s consider some implications of the current state of things in terms of volatility:

1. To get back to $20k some amount of volatility is needed (just logically to move the price, but also to draw back in volume). Little modest moves, unless they are mostly bullish, aren’t going to take us $20k in a hurry. Historically you can see that it takes big moves to reinvigorate traders and investors (which is backwards a bit for investors, because ideally you’d want to dive in and build a position at or around the bottom).
2. Traders thrive on large upwards and downwards movements. Unless you are using 100x leverage at Bitmex, you need crypto to move to make money in the short term (trading and investing are different and each can be done a number of ways, some styles benefit from more volatility, some from less).
3. If no one is making money, and if Bitcoin becomes “boring” (see 2015), it is more likely to drive away even more traders and investors and result in a further decrease of trading volume.
4. All that said, wherever we end up, and whoever ends up in the market, we can be confident a subsection of people will be happy to trade in that range and build positions for the future. Ether and Litecoin were both in this state from September 2017 to late October 2017, Bitcoin was in this state for most of 2015. In times like this trading volume is low and a few big players control the range (bulls and bears reach equilibrium on one hand, on the other hand large players put up buy / sell walls that the traders left in the market can’t effectively deal with, either way… this is where accumulation happens; this is when you want to accumulate if you aren’t a good trader; that is, when the price is flat, volume is low, and volatility is low).
5. At some point it is likely that volatility and volume will come back (with each following each other in a cyclical pattern). It is only logical that the start of that will coincide with a large upward or downward movement.

If you look at 2014 there are a few places on the chart that look like where we are now. One is near the bottom (the 4th and 5th red arrows in the 2014 chart below), a few others suggest more downside if 2018  (the 1st and 3rd arrows).

The 2018 chart here is a little old, but the 2014 chart is historic. Compare to the TradingView page I had you open above.

Bottom Line

If you look at 2014, and you look for where volatility began to decrease, you are in most cases going to be looking more toward the end of the correction than the beginning.

The only instance I can see where I wouldn’t look to the end of the correction is that second arrow under 2014 in the chart above… the one right before an epic rally which create a sort of “Adam and Eve Double Bottom.”

I honestly don’t know what part of 2014 is repeating, if any… and I don’t think it’ll repeat exactly. However, I do think we will be able to compare the two charts when this is all said and done because human behavior in a speculative market did not change between 2014 and 2018… and it is humans in a speculative market that cause bubbles to inflate and pop 😉

Anyway, there isn’t one singular point to what I’m saying here (aside maybe, volatility is low). The only real point here is to bring up the central point and muse on different things it can mean in relation to past cycles.

Clearly the first part of the bubble pop with the insane volatility has played out already, so that part is already done. Thus, at this point I’m looking to see how the next part of the cycle plays out and how the resolves back into the next bull run.

Historically volatility has decreased in the weeks / months before it ramped back up again, but for all that to happen we need to be at the end of the bubble pop. If I squeeze the chart enough or move to high enough time frames I can make a case that volatility is still present. There really is no way to magically know how flat and boring this needs to get before we stop bleeding out… but logically I’m looking for a set of factors to figure out where the bottom is and where the next run begins and volatility is one of them.