On March 12th, Bitcoin volatility went through the roof. Within the span of 24 hours, the price of the leading cryptocurrency fell off a cliff, to say the least, tanking from $7,700 where it had started the 12th to a low of $3,700, wiping out billions of dollars of crypto-wealth.
This was one of the crypto market’s worse days ever, accentuated by the $1 billion+ worth of leverage trading positions liquidated on platforms like BitMEX, which resulted in many traders capitulating, leaving Bitcoin for greener pastures.
But, data shows that after mid-March’s volatility spike, the market has calmed dramatically. As it turns out, that means another explosive move is likely on the horizon.
Bitcoin Volatility Plunges
According to data shared by crypto analytics site Skew.com, the implied volatility of the Bitcoin price — derived from the trading of BTC options derivatives — has collapsed by approximately 50% in the past 30 days from 142% to 76%. The site described the trend as “one-way traffic despite the halving approaching.”
Implied volatility over the last month has been one-way traffic despite the halving approaching pic.twitter.com/wLaC5NolIZ
— skew (@skewdotcom) April 18, 2020
Although 76% implied volatility is still rather high for a multi-billion-dollar asset — the implied volatility of the S&P 500 is currently around 30% (though it normally trends at ~10%) — the fact that volatility has dropped so far so fast suggested a strong move is coming.
The Bollinger Bands, which is a technical indicator that mainly shows how volatile an asset is, has started to tighten to levels seen prior to explosive moves.
The chart below illustrates this point, which shows the width of the Bollinger Bands on Bitcoin’s one-day chart is nearing a point that historically preceded strong surges in volatility.
Furthermore, it’s a common belief that when volatility is low in markets for extended periods of time, strong moves follow. Bitcoin, which has printed five weeks of bullish price action in a row without fail, is thus setting itself up to see a massive move.
But in which way?
Analysts Lean Bearish About Bitcoin’s Short-Term Future
Interestingly, the consensus is that yet another move lower will transpire for the Bitcoin market.
A hedge fund manager named Mark Dow — the same investor who shorted the $20,000 top in December of 2017 and covered 12 months later at the $3,000s bottom — recently shared that he thinks the cryptocurrency is on the “edge of a cliff,” adding:
“I’ve been saying…that Bitcoin on the chart is facing massive overhead resistance. Based on this chart, this rn is a textbook opportunity to short,” he said while pointing to the below image.
This bearish assertion has been backed up by technical analysis.
Avi Felman — a trader and analyst at crypto-asset fund BlockTower — observed two signs that a bearish reversal after the rally from $3,700 to $7,400 is likely:
- The Tom Demark Sequential just printed a “9” candle on the three-day chart for BTC. Previous “9” candles on this chart marked the mid-March bottom and the December 2019 bottom, but front-ran the $10,500 top seen earlier this year.
- Bitcoin has failed to break its three-day 50 and 200 simple moving average.
Not to mention, many have begun to suggest that the 30% bounce the stock market has seen since the bottom is textbook complacency.
The Financial Times’ Robin Wigglesworth shared the below analysis from French banking group BNP Paribas, which suggests that despite the VIX (the implied volatility of the S&P 500) falling off dramatically from the highs, that unlikely means the bottom for stocks is in.
He said “stocks tend to bottom out with a lag to the big Vix spike, as exemplified by 2008,” which shows that there was a drawn-out downtrend after the initial panic in markets.
Stocks tend to bottom out with a lag to the big Vix spike, as exemplified by 2008. pic.twitter.com/hHKLBBbdB3
— Robin Wigglesworth (@RobinWigg) April 18, 2020
Bitcoin, because it has a running positive correlation with the S&P 500 as found by the Federal Reserve’s Kansas City branch, stands to be harmed by yet another leg lower in the stock market.