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When it comes to Bitcoin (BTC -0.50%), the conventional wisdom is that it is a risky, highly volatile asset prone to sharp price fluctuations. Indeed, for much of its history, Bitcoin has been characterized by very high volatility.
But that may be changing. Since April, Bitcoin’s volatility has been on the decline. In fact, it touched historically low levels in late summer. Bitcoin’s future price trajectory could depend on this metric, so let’s take a closer look.
By just about any measure, Bitcoin’s volatility (i.e., how much Bitcoin’s price fluctuates within a given time period) is trending down and approaching all-time lows. This first became a phenomenon late last year when crypto traders began to complain that Bitcoin was becoming “boring.” Instead of seeing massive price swings daily, the price of Bitcoin seemed to move within a very narrow band. And that same trend has persisted into 2023. If you’re wondering why Bitcoin has not been able to punch through the $30,000 mark recently or why there’s little to no movement after major news events, this is the reason.
In mid-August, a popular Bitcoin volatility index (known as the BVOL) touched a new low, and some crypto analysts were quick to point out the “exhaustion and apathy” for Bitcoin. You can see this on the chart below showing changes in Bitcoin’s volatility in 2023:
Data by TradingView
But let’s zoom out for a second and see how the current period stacks up against previous historical evidence. This chart shows Bitcoin’s volatility since 2016, and it is eye-opening, to say the least. At a glance, you can see how Bitcoin’s current volatility is clearly at historical lows. Annualized volatility previously approached 100% to 200% during certain periods, and now it’s around 10%:
Data by TradingView
One view about this extraordinary change to Bitcoin volatility is that this is the new norm. As Bitcoin goes increasingly mainstream and as more institutional investors boost their allocation to crypto, Bitcoin could lose some of its volatility. Quite simply, large institutional investors (think pension funds and university endowments) have much longer investment horizons than speculators and traders, and this should help reduce some of the zigs and zags in Bitcoin’s price.
Image source: Getty Images.
There is some evidence to support this theory beyond just lower volatility figures. For example, the supply of Bitcoin on cryptocurrency exchanges appears to be on the downswing. The basic idea here is that, as more Bitcoin goes off-exchange for secure long-term holding, less Bitcoin can be traded on the major crypto exchanges, and this should reduce volatility.
However, the opposing point of view is that the current period is the proverbial “calm before the storm.” Quite simply, this unprecedented period of lower volatility could precede a major spike in volatility as Bitcoin explodes in value. In the past, this has been the pattern with Bitcoin. In two different cases, a prolonged period of relatively low volatility led to Bitcoin skyrocketing in value. Of course, past performance is no guarantee of future performance.
Volatility is important because it directly impacts the future price trajectory of Bitcoin. High volatility increases the chances of major price swings, both to the upside and the downside. In short, it’s what makes huge Bitcoin rallies possible. These rallies draw in speculators and short-term traders, making Bitcoin even more volatile.
Thus, when you hear investors suggesting that Bitcoin could soar to $100,000 or skyrocket to $1 million within a very short period, they are likely assuming that Bitcoin’s volatility will eventually return to its previous levels. This is what enables huge price swings over a relatively short period.
But what if lower volatility is the new norm? Well, then, the chances of Bitcoin spiking to $100,000 anytime soon are very much limited. At this point, it is still too early to say that Bitcoin’s volatility is in permanent decline. Crypto has always been a risky, highly volatile asset class, and Bitcoin’s current volatility could simply be a historical aberration.
But maybe it’s not, considering all the new institutional money flowing into Bitcoin. So keep your eye on Bitcoin’s volatility — this might end up being one of the biggest factors determining whether or not it can soar in value heading into 2024.
Dominic Basulto has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.
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