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

Bitcoins A lack of recent volatility isn’t a bad thing and may actually point to signs of a “bottom” in prices, analysts and investors told CNBC.

Digital currencies have fallen sharply since a searing run in 2021 that saw bitcoin climb as high as $68,990. But in recent months, bitcoin’s price has bounced stubbornly around $20,000 in a sign that volatility in the market has subsided.

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

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

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

But bitcoin’s price 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 now, indicating consolidation and a potential bottoming pattern, given that we also see the dollar index peaking,” Vijay Ayyar, head of international at crypto exchange Luno, told CNBC in e- post comments.”

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

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

Cryptocurrencies have undergone a brutal downturn this year, losing $2 trillion in value since the height of the 2021 rally. Bitcoin, the world’s largest digital coin, is down around 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 curb rampant inflation. Large crypto investors with highly leveraged bets such as Three Arrows Capital were crushed by the pressure on prices, further accelerating the market’s decline.

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

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

“Bitcoin being stuck in such an area makes it boring, but this is also when retail loses interest and smart money starts to accumulate,” Ayyar said.

Matteo Dante Perruccio, international president of digital asset management firm Wave Financial, said he has seen a “counterintuitive increase in demand from traditional institutional investors in crypto at a time when you would generally see interest drop off in the traditional markets.”

Financial institutions have continued to make inroads into crypto despite the price drop and waning interest from retail investors.

Mastercard announced a service that allows banks to offer crypto trading, after launching a new blockchain security tool for card issuers. Visa, meanwhile, teamed up with crypto exchange FTX to offer debit cards tied to users’ trading accounts.

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

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

Selling pressure has also eased as bitcoin miners reduced sales of the cryptocurrency, suggesting that 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 the time when crypto winter finally ends.

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

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

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

The main thing that will lead to greater buying of bitcoin will 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 officials at the central bank are reportedly considering slowing the pace of future hikes.

“Clients are telling us that when the Fed swings, or is 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 fund flow perspective and suggest that short sellers are beginning to capitulate.”