Bitcoin remains rangebound, but volatility ahead

Bitcoin is well known for its volatility, capable of spiking up or plummeting down price charts in mere minutes. These moves are often orders of magnitude above what other asset classes could do in weeks. Yet recently, these trademark moves have been absent; Bitcoin has been rather serene, treading water for a few months now. 

A glance at its price chart shows an unusually flat line, a far cry from the doctor’s handwriting-style squiggles it often produces. 

Presenting the price in an alternative way in the next chart, by plotting the rolling weekly returns, we can see the entire year has been rather muted, aside from the jump up at the start of the year and the surge in mid-March as markets reacted to the banking failures led by Silicon Valley Bank. 

Looking at implied volatility in options markets, we are also coming out at all-time lows. This is exacerbated by a dearth of activity across the entire crypto space. The next chart, via the Block, displays spot volumes on exchanges. Volumes have been trending downwards for the last eighteen months; July brought a further fall, and we are now at levels last seen in 2020. 

Why is volatility and volume so low?

So, why?

The first answer is the most simple: the classic summer trading lag. We see this across all asset classes, and while the effect has been dramatic in crypto, the seasonality effects are undeniable. As we can see from this chart from Kaiko, Q3 has comfortably seen the lowest amount of trading volume in Bitcoin’s history, 19% below the next lowest quarter (Q4). 

Having said that, we have a very short sample space to work with. While the above chart takes volume from 2012 to 2022, Bitcoin only traded with reasonable liquidity for perhaps half of that (at best). Additionally, volumes have been trending down all year; we are currently at the lowest levels since 2020, but it’s not as if the first two quarters were a bonanza of trading activity. 

The great regulatory crackdown in the US has also been a factor. Lawsuits have been levelled against Binance and Coinbase, and while the Ripple case seemed to be at least a partial win (from crypto’s point of view) in the great securities debate, the landscape is undoubtedly harsher from a legal standpoint. 

The SEC’s case against Binance sums it up. It levels all sorts of accusations, from trading against customers, manipulating trade volumes (suggesting that the already-low volumes may be even lower in reality), circumventing KYC and AML laws and many more. This is an exchange that began the year with a 67% market share, by far the biggest crypto exchange on the planet. The drain on the space of these regulatory battles has been formidable. 

However, while the regulatory travails and summer lag have suppressed volumes and liquidity, the bear market that ravaged the sector last year is perhaps the biggest driver, even if prices have bounced back in 2023. Despite the rebound, Bitcoin remains over 55% off its all-time high from late 2021, while the space took serious beatings in the form of the Terra crash, the FTX scandal and myriad other bankruptcies and collapses. 

Spot volume across exchanges fell 46% last year, so again, this is not solely a result of the typical summer lag. 

Will volatility and volume return?

Yes.

But first, as a caveat, we mentioned above when discussing the sample from which the summer trading lag is drawn, we need to be cautious about extrapolating past cycles for Bitcoin. We merely have a few years of price data, and the quickly-changing environment amid that sample, as Bitcoin sprouted from a niche Internet project to a multi-billion (and briefly trillion) dollar asset.

Having said that, if one thing is true, it is that Bitcoin has hardly been synonymous with stability thus far, and we can be confident that the notorious volatility will return at some point. 

Interestingly, one factor could be the thin liquidity itself. We have discussed collapsing volumes here, but this also means liquidity is low. Downloading an order book from most major exchanges these days will leave you questioning how things have got so shallow (books saw big drawdowns post-FTX and there remains an Alameda-sized hole in market making activity).. With thin liquidity, it takes less capital to move prices, meaning moves to both the upside and downside can be amplified.

Secondly, Bitcoin remains a risk-on asset, subject to the whims of the macro environment. And in the last couple of months, we have experienced a relatively placid macro climate. Inflation continues to tick down, the market turns its eyes toward a potential ending of the hiking cycle and the coveted soft landing begins to (maybe?) seem less far fetched (although there is still reason to be cautious). But all this came smoothly and gradually, without any real surprises, the market having priced most events in. There have not really been any shocks to strike the market recently.

Overall, however, the next chart tells you all you need to know.

Bitcoin may one day settle down for good, trading like a store of value with minimal liquidity, with Robinhood traders decrying how boring it is. But this summer is not that time. Like we keep saying, we need to be prudent when looking back at Bitcoin history, but the above chart screams one thing: volatility. It may have taken a short break, but volatility will be back before long. 

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