Bitcoin Sees Biggest Volatility Spike of the Year; Should Long-Term Holders Be Worried?

Bitcoin’s precipitous drop over the past 48 hours has rendered the virtual currency highly susceptible to new bear-market lows. According to one indicator, the sudden and dramatic downshift disrupted a period of calm not seen  disrupted a period of calm not seen in over two years.

Bitcoin Volatility Surges

In the span of just 24 hours, bitcoin’s 30-day volatility index more than doubled, reaching the highest level since early October. The doubling was not only the quickest surge in expected volatility exhibited this year, but also the largest in terms of percentage growth.

According to bitvol.info, the volatility index surged to to 2.16% on Wednesday compared with just 1.05% on Tuesday. Just one day prior, the volatility tracker reached its lowest level since 2016.

To provide a comparison of just how quickly fortunes changed, the volatility index jumped 0.87 percentage point between July 22 and Aug. 13. The 30-day tracker also climbed 1.1 percentage point over a four-week stretch ending July 2. Despite those gains, the volatility regime has been in a firm downtrend since the beginning of the year thanks in large part to the arrival of bitcoin futures trading on CBOE and CME.

To recap: the bitcoin volatility index measures how much the price of BTC varies over time. The 30-day reading is calculated using the standard deviation of the daily open price over the previous month. The volatility index is also reported at 60-day, 120-day and 252-day windows. In all cases, the figures have skyrocketed over the course of the week.

In the fast-moving crypto markets, volatility is a double-edged sword. Periods of heightened uncertainty bring about substantial changes to the underlying price of digital assets. This can go both ways: it can produce unprecedented gains like we saw in 2017 or relentless crashes like we’ve observed on at least three occasions this year.

Where’s the Bottom?

Bitcoin’s outlook turned bleak on Wednesday after prices crashed below the $6,000 floor, opening the door to fresh yearly lows that pierced below $5,200. With fundamental support ($6,000) blown out of the water, market participants are bracing for a more protracted downturn in the weeks and months ahead.

Aggregate data via CoinMarketCap show an average bitcoin price of around $5,545 as of Saturday afternoon. Should bearish sentiment prevail, a test of the $5,000 support could be on the horizon. This level is consistent with forecasts put forward by leading crypto analysts Willy Woo and Crypto Rand.

As reported by Hacked three weeks ago, bitcoin’s NVT Ratio leaves little doubt about the intensity and longevity of the current bear market. The ratio, which divides bitcoin’s market cap by its average daily volume, suggests we are about halfway through a long-term bear trend. Declining trade volumes, the absence of retail interest and a deep schism in the bitcoin cash community all play into this narrative. Market manipulation also cannot be ruled out when analyzing sharp and sudden movements in the bitcoin price, especially with no fundamental catalyst present.

These factors should have very little impact on long-term holders of bitcoin. For starters, BTC is gaining widespread acceptance in institutional circles. Although this has not yet resulted in a commensurate uptake in actual trading, bitcoin and digital assets more generally have enjoyed wider recognition as a legitimate asset class. Secondly, bitcoin’s fundamental picture has changed very little from peak-to-trough, which suggests that the downturn has less to do with bitcoin’s perceived value as an asset class/future payment platform and more to do with market sentiment, speculation and technical re-positioning.

Thirdly, bitcoin whales appear to have played no part in the latest price collapse. If anything, whales have contributed to bitcoin’s continued stability over the past year. So long as the largest wallets aren’t actively unloading their positions, there’s little reason to fear that big investors have a vested interest in tanking the market.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

Author:
Chief Editor to Hacked.com and Contributor to CCN.com, Sam Bourgi has spent the past nine years focused on economics, markets and cryptocurrencies. His work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Avid crypto watchers and those with a libertarian persuasion can follow him on twitter at @hsbourgi