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What is the Cause of Bitcoin's Low Volatility?


What’s up crypto enthusiasts, traders and investors? I hope all is well.

I read an article that came out yesterday titled “Bitcoin Market Has Run Out of Juice”. The article seems to be based on a report put out by Element Group a cryptocurrency economics and digital assets solutions analyst. The article states that the report explains that the SEC’s delay in approving any bitcoin ETF proposals is the primary reason why the market has become so boring and volatility so low in recent weeks. That article got me thinking, could there be another explanation for the large drop in volatility that we have seen, especially over the last few weeks. After I thought about it for a while I started to wonder if maybe the drop-in volatility is more just a normal part of a correction cycle rather than being news or event driven.

So, first I started looking at some of the other cryptocurrencies to see if they also have experienced a large drop in volatility over the past 9 or 10 months. I concentrated on cryptos with larger market capitalization because I felt they were most likely more widely traded. What I found was that they all had substantial reductions in volatility since the beginning of this year, but a few of them hit a low a month or so ago and since have had an increase in volatility . I also went back and look at the boom and correction cycle bitcoin went through starting at the end of 2013 and running into 2015 you will also see a very similar pattern to what we are seeing now. Before and after the peak there was extreme volatility but as the price moves closer to the bottom there is a substantial reduction in volatility .

I also decided next to look at various stocks that had gone through severe corrections to see how the price action changed as the correction cycle progressed. So first I examined a chart of Amazon during the dot-com crash and what I found was that to me it looks very much like bitcoin does over the past 10 months. I am not saying that the price pattern looks the same but that the way the volatility decreases as the correction cycle progresses does follow the same pattern. You can see that before and after peaking Amazon experienced wild price swings but the closer the price got to the ultimate bottom the volatility subsided just as bitcoin has done. I then went on and examined several other stocks and found similar patterns, this substantial drop in volatility seems to be most prevalent in stocks that experience a severe correction along with a prolonged consolidation period. There were some that I found where they did experience a correction but then bounced back quickly in the form of a “V” shaped bottom, in those instances there was a drop-in volatility but not to the extent that I found with bitcoin, Amazon or the others that had prolonged consolidation periods.

So, after examining quite a few different examples I believe what we are seeing with bitcoin may well be just a very normal part of a typical correction cycle, I would characterize what we are seeing now as kind of a cooling off period such as you see during a normal consolidation phase. I am not saying that bitcoin, other cryptocurrencies or any other asset can not be affected by news or events because they can, my opinion is just that for the most part the price action we are seeing right now is very natural.

I hope you enjoyed this article.

Until the next one, Take care!



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