Bitcoin (BTC +0.84%) has been locked in a relatively tight trading range of $16,000 to $18,000 for months now, making this crypto much less volatile than it has been in some time. In fact, Bitcoin's 30-day volatility has sunk to June 2020 levels. During one five-day period in early January, Bitcoin was actually less volatile than gold, the NASDAQ, and the S&P 500.
So what's going on here? This statistic could signal a long-term trend of Bitcoin becoming less volatile over time as it becomes more of a mainstream risk asset held by both retail and institutional investors. Or it could be the calm before the storm before Bitcoin explodes in value.
Why Bitcoin's volatility matters
Volatility is just a statistical measure of how much Bitcoin's value fluctuates up and down over time. The higher the volatility, the higher the potential fluctuation. This is true for both the upside and the downside. Thus, Bitcoin's relatively high historical volatility means it is capable of higher highs and lower lows than other assets. In many ways, volatility is the key to understanding what makes Bitcoin so unique as an asset.
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Whenever there is a significant change to this statistic, investors pay attention. When Bitcoin's volatility lowers, it starts to behave more and more like a risky tech stock in the NASDAQ. And as Bitcoin's volatility lowers even further, it starts to behave more and more like a stock you might find in the S&P 500. Thus, you can think of volatility as a proxy for risk. The higher the volatility, the riskier an investment seems to be.
So you can see why investors are keeping a careful eye on this statistic. The fact that Bitcoin's volatility dipped below that of gold, the NASDAQ, and the S&P 500 at the same time is sort of a trifecta of strangeness. Analysts refer to this rare occurrence as "relative volatility compression," and it happens only rarely. But when it happens, it typically signals a huge breakout for Bitcoin.
A bullish signal for Bitcoin
That's why I think this calm before the storm could actually be an important signal for an incoming Bitcoin bull market rally. Relative volatility compression has only happened five times in the past, and usually for just a day or two. So the longer this anomaly persists, the stronger the signal it could be.
CRYPTO: BTC
Key Data Points
According to traders, there were similar signs at the bottom of the 2018 bear market and just before the start of the 2020 bull market rally. Thus, if you believe in historical precedent, a period of ultra-low volatility could be a signal for an explosive rally to the upside. Intuitively, this makes sense. Bitcoin has been trapped in such a narrow trading range for so long that when it does break out, it could be massive.
A bearish signal for Bitcoin
Of course, some traders interpret this calm before the storm in completely the opposite way. In late November, the European Central Bank interpreted Bitcoin's price stabilization to be "an artificially induced last gasp before the crypto asset embarks on a road to irrelevance." From its perspective, all it takes is one bad macroeconomic number and Bitcoin is headed to zero. That seems to be the mantra of all the Bitcoin ultra-bears, who are convinced that Bitcoin is headed for irrelevance. Over the winter holidays, noteworthy Bitcoin ultra-bear Peter Schiff even gave a so-called "Christmas gift" to investors, urging them to sell their Bitcoin before it's too late.
Buckle your seatbelts
While traders can't seem to agree whether low volatility is a positive or a negative for Bitcoin, everyone agrees that something's up. Ever since October, when Bitcoin's volatility fell to two-year lows, there have been more stories in the mainstream financial media about Bitcoin's surprisingly low volatility. After all, it is newsworthy when Bitcoin is less volatile than the S&P 500. Traders interviewed for these stories typically describe the current Bitcoin trading environment as "boring," because nothing seems to be happening.
But I don't think Bitcoin is boring right now. In fact, quite the opposite. I think a major move is imminent, and I'm bullish on what it means for the future price of Bitcoin.
