Bitcoin’s volatility has decreased, but that’s not a bad thing

Representations of the cryptocurrency Bitcoin are seen in this picture, August 10, 2022. REUTERS/Dado Ruvic/Illustration

Dando Ruvic | Reuters

of Bitcoin The lack of volatility lately isn’t a bad thing and could actually indicate signs of a “bottom” in prices, analysts and investors told CNBC.

Digital currencies have fallen sharply after a hot run in 2021 that saw bitcoin climb to $68,990. However, in recent months, the price of bitcoin has stubbornly bounced around $20,000, a sign that market volatility has subsided.

Last week, the cryptocurrency’s 20-day rolling volatility fell below that of the Nasdaq and S&P 500 for the first time since 2020, according to data from cryptocurrency research firm Kaiko.

Stocks and cryptocurrencies are falling sharply this year as interest rate hikes by the US Federal Reserve and a strengthening dollar weigh on the sector.

Bitcoin’s association with stocks has grown over time as more institutional investors have invested in crypto.

But the price of bitcoin has stabilized recently. And for some investors, this easing of volatility is a good sign.

“Bitcoin has essentially been range-bound between 18-25K for 4 months, which suggests consolidation and a potential bottoming pattern as we see the dollar index rising as well,” Vijay Ayyar, head of international at crypto exchange Luno. he told CNBC in emailed comments.”

“In the past, like 2015, we’ve seen BTC bottom when DXY has topped, so we could see a very similar pattern play out here.”

Antoni Trenchev, co-founder of crypto lender Nexo, said bitcoin’s price stability is “a strong sign that the digital asset market has matured and is becoming less fragmented.”

End of crypto winter?

Cryptocurrencies have suffered a brutal decline this year, losing $2 trillion in value since the peak of the 2021 rally. Bitcoin, the world’s largest digital currency, is down about 70% from its peak in November.

The current so-called “crypto winter” is largely the result of aggressive tightening by the Fed, which has raised interest rates in an attempt to tame soaring inflation. Large cryptocurrency investors with highly leveraged bets, such as Three Arrows Capital, suffered from price pressure, further accelerating the market’s decline.

However, some investors believe that the ice may now be beginning to thaw.

There are signs of an “accumulation phase,” according to Ayyar, when institutional investors are more willing to bet on bitcoin given the easing of prices.

“Bitcoin being stuck in such a range makes it boring, but that’s also when retail loses interest and the smart money starts piling in,” Ayyar said.

Matteo Dante Perruccio, president of international digital asset manager Wave Financial, said he has seen a “counterintuitive increase in demand from traditional institutional investors in cryptocurrencies during a time when you would generally see interest in traditional markets declining.”

Financial institutions continued to take action on crypto despite falling prices and reduced interest from private investors.

Mastercard has announced a service that allows banks to offer crypto transactions, having previously launched a new blockchain security tool for card issuers. Visa, meanwhile, has partnered with crypto exchange FTX to offer debit cards linked to users’ trading accounts.

Goldman Sachs suggested that we may be nearing the end of a “particularly bearish” period in the latest cryptocurrency movement cycle. In a note released on Thursday, the bank’s analysts said there were parallels with bitcoin trading in November 2018, when prices stalled for a while before rising steadily.

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“Low volatility [in Nov. 2018] followed by a large bitcoin bear market,” Goldman analysts wrote, adding that “crypto QT” (quantitative tightening) occurred as investors poured out of stablecoins such as tether, reducing liquidity. USD Coin circulating supply — a stablecoin linked to with the US dollar — has fallen $12 billion since June, while tether circulation has fallen over $14 billion since May.

Selling pressure has also slowed as bitcoin miners cut back on sales of the cryptocurrency, suggesting the worst may be over for the mining space. Publicly traded bitcoin miners sold 12,000 bitcoins in June and only about 3,000 in September, according to Goldman Sachs.

Wave Financial’s Perruccio expects the second quarter of next year to be when the cryptocurrency winter comes to an end.

“We will have seen many more failures in DeFi [decentralized finance] space, many of the smaller players, which is absolutely necessary for the industry to evolve,” he added.

All eyes on the Fed

James Butterfill, head of research at crypto asset manager CoinShares, said it was difficult to draw too many conclusions at this stage. However, he added, “we are erring on the side of greater potential for upside rather than further price declines.”

“The largest capital outflows recently have been in short-Bitcoin positions ($15M this month, 10% of AuM), while we’ve seen small but steady inflows into long Bitcoin over the past 6 weeks,” Butterfill told CNBC via email.

The main thing that would drive more bitcoin buying would be a signal from the Federal Reserve that it plans to ease its aggressive tightening, Butterfill said.

The Fed is expected to raise interest rates by 75 basis points at its meeting next week, but central bank officials are reportedly considering slowing the pace of future hikes.

“Clients are telling us that once the Fed turns or gets close to it, they will start adding positions to Bitcoin,” Butterfill said. “The recent liquidations of net shorts are in sync with what we are seeing from a capital flow perspective and suggests that short sellers are starting to capitulate.”

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