Bitcoin becoming less volatile than stocks raises warning flag

AT FIRST blush, Bitcoin becoming less volatile than stocks might appear like a positive development. But crypto traders are warning that in a low-volume environment, that might not be a great thing. 

The coin’s 30-day realised volatility has “dropped sharply” in recent days, said Noelle Acheson, author of the newsletter, Crypto is Macro Now. It is currently at around 52 per cent after spending the past month above 64 per cent on an annualised basis, according to Coin Metrics data compiled by Acheson.

Jake Gordon at Bespoke Investment Group points to a volatility gauge called BitVol, which has “begun to break down”, falling to near its lowest levels since the spring. The index currently clocks in at a little above 69, down from more than 111 in May. 

Yet, trading volume has also slumped. Daily readings are hovering around US$47 billion right now, down from more than US$100 billion at the start of the year, according to data tracker CoinMarketCap.com. 

And even though lower volatility is typically welcomed in the stock market, for instance, the combo could spell trouble for Bitcoin, where there tend to be plenty of speculators who enter the space purely for the thrill of the swings. 

ARK Investment Management analyst Yassine Elmandjra said on Bloomberg TV on Tuesday: “Low volatility in Bitcoin might not necessarily be a good thing, especially if it’s on low volume.” He cited the instance of late 2018, when Bitcoin was hovering around US$6,000 and many had expected what appeared to be overly pessimistic sentiment to result in a short squeeze, though the coin instead “dumped” to US$3,000. 

“So while low volatility is perhaps an indication that Bitcoin is becoming more boring and less contrarian, low volatility on low volume might not be great for Bitcoin.”

Crypto has suffered this year as the Federal Reserve and other central banks aggressively raise rates to cool inflation. That has pushed a lot of digital-asset investors – especially those who had entered the fray in just over the last few years – away from the space and from daily trading, a big change from the hype-fueled mania of years past. Retail investors, in particular, have been missing in action. Meanwhile, institutions have become the main players recently, potentially helping to explain why volatility has declined. 

“The macro backdrop is really affecting us just as it’s affecting every other asset class,” Tim Grant, head of Europe, the Middle East and Africa (EMEA) at Galaxy Digital, said on Bloomberg TV this week. “It’s not a retail asset class any more.” 

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All of it has pushed market-watchers to try to decipher signs of Bitcoin and other tokens potentially hitting a bottom. Bitcoin has shed 60 per cent this year, while the S&P 500 is down about 25 per cent. Still, much of the selling in crypto took place in the first half of 2022, with exchange-traded fund flows reflecting that: The money flowing out of crypto-related funds in the third quarter slowed down, a sign that many bearish investors may have already piled out of the risky asset class.

The fear with the low-volatility, low-volumes noxious mix is that such an environment could mean prices drop faster in the event of a sell-off. 

Steven McClurg, co-founder and chief investment officer at digital-asset fund manager Valkyrie Investments, said: “In an overall bear market, you do not want low volatility coupled with low volume; because we’re already in a recessionary period, we believe it could get worse and the Fed will continue to raise rates and people might start taking money off the table. And when there’s low volume and low volatility, it will cause prices to go down faster, it could cause higher volatility.” BLOOMBERG