Crypto traders warn that in a low volume environment, that may not be so great.
At first glance, it seems a positive development that Bitcoin is becoming less volatile than stocks. But crypto traders warn that in a low volume environment, that may not be so great.
According to Noelle Acheson, author of the newsletter “Crypto is Macro Now,” the currency’s realized volatility has “dropped sharply” in recent days. It is currently around 52% after spending the past month above 64% yoy, according to Coin Metrics data collected by Acheson. Meanwhile, Bespoke Investment Group’s Jake Gordon points to a volatility meter called BitVol, which “started to crumble” and fell to nearly its lowest level since spring. The index currently clocks in at just above 69, up from over 111 in May.
However, the trading volume has also fallen. Daily readings currently hover around $47 billion, up from over $100 billion at the start of the year, according to data tracker CoinMarketCap.com.
And while lower volatility is typically welcomed in the stock market, the combination could pose problems for Bitcoin, for example, where many speculators enter the space purely for the thrill of the swings.
“Low volatility in Bitcoin may not necessarily be a good thing, especially if it has low volume,” ARK Investment Management analyst Yassine Elmandjra told Bloomberg TV on Tuesday. Elmandjra was quoting late 2018 when Bitcoin hovered around $6,000 and many had expected what overly pessimistic sentiment would result in a short squeeze, though the coin was “dumped” to $3,000 instead.
“So while low volatility may be an indication that Bitcoin is becoming duller and less contrarian, low volatility at low volume may not be great for Bitcoin.”
Crypto has suffered this year as the Federal Reserve and other central banks are aggressively raising rates to cool inflation. That has pushed many digital asset investors — especially those who have entered the past few years — out of space and out of day-to-day trading, a big change from the hype-driven mania of recent years. Private investors in particular have disappeared into action. Meanwhile, institutions have become the main players of late, which may help explain why volatility has declined.
“The macro backdrop affects us, just like any other asset class,” Tim Grant, head of EMEA at Galaxy Digital, told Bloomberg TV this week. “It is no longer an investment category for individuals.”
All of this has prompted market viewers to try to decipher signs of Bitcoin and other tokens that may be bottoming out. Bitcoin has lost 60% this year, while the S&P 500 is down about 25%. Still, much of the crypto selling occurred in the first half of 2022, with exchange-traded fund flows reflecting the following: Money flowing out of crypto-related funds in the third quarter slowed, a sign that many bearish investors are already piled up from the risky asset class.
Bitcoin fell about 2.6% to $18,666 at 6:55 AM in New York on Thursday, its lowest level in about two weeks.
The fear of the damaging mix of low volume and low volume is that such an environment could cause prices to fall more quickly in the event of a sell-off.
“In a general bear market you don’t want low volatility coupled with low volume because we are already in a recession period, we think it could get worse and the Fed will continue to raise interest rates and people may be taking money off the table to fetch. said Steven McClurg, co-founder and chief investment officer at digital asset fund manager Valkyrie Investments. “And when there is low volume and low volatility, it will cause prices to fall faster, which can cause higher volatility.”