- Bitcoin has been tightly range-bound for the past month, its 10% drop this week the biggest move since the banking crisis
- Our head of research Dan Ashmore warns volatility will soon return
- He wrote that more than 50% of stablecoins have left the exchange and order books are thin, which means there is no need to push the price.
- T-Bills Paying 5% Draw Capital Out of Space, Leaving Bitcoin More Open to Big Price Moves
- Direction will depend on interest rate policy with economy at critical juncture
Bitcoin Has pulled back over the past week, with the orange coin taking a 10% plunge from north of $30,000 to $27,200. But what is remarkable about this movement in prices is how simple it is.
Bitcoin has been extremely strongly bullish since the banking crisis subsided last month, with its daily moves being much smaller than its usual extreme volatility. This relatively benign 10% move – bitcoin printed a 10% candle in a matter of seconds – is the biggest move since the banking crisis and has sent bitcoin upward as interest rate forecasts soften.
In fact, when you plot the average of the past 30 days of price volatility, this past month is now near flat, but history shows that it has never stayed around that calm level for long.
We can be especially certain that volatility will return this time around. This is because one of the major factors of increased volatility is as prominent as ever in the bitcoin markets: lack of liquidity.
With less liquidity, less money is needed to move prices. And right now, liquidity is as thin as it has been in quite some time.
since almeida’s exit after the disastrous ftx collapse, The order book has been shallow. Another indicator of this is to look at stablecoin balances on exchanges. i put together Detailed analysis Analysis of the recent extraordinary outflow of stablecoins from exchanges: 45% of total balances have fled exchanges over the past four months. The updated figure shows stablecoins have moved over 50% since December.
In a world where interest rates have risen at the fastest rate in recent memory while yields in the crypto space plummet, this is perhaps not surprising. T-Bills are now paying more than 5%, while crypto investors have seen countless shocks in the space – Celsius, Terra and FTX – while sentiment has collapsed and fear has flooded the market.
Why would anyone hold a stablecoin with the risk of flooding the market last year when a US government-guaranteed investment is paying 5.1%?
And so, while bitcoin has been following a relatively peaceful path over the past month, the party on the charts will soon be back. With thin liquidity comes high volatility, which means that if there is a trigger in the market, the price of bitcoin can move much further than it would otherwise.
In fact, looking at the volatility metrics, while it has dipped over the last two weeks, realized volatility was the highest it has been since June 2022. earlier this month, So while price moves are canceling each other out as bitcoin oscillates within a tight window, counter-intuitively, volatility is still high.
The trillion-dollar question, of course, is which direction it will go.
I’m not smart enough to predict that with any degree of confidence in the short term, but which way it plays out will depend on macro conditions. As bitcoin continues to edge the stock market, its correlation with the tech-heavy Nasdaq is particularly high.
As financial markets remain dependent on interest rates, the word from Jerome Powell and the Federal Reserve will be important. Taking a backseat to the outlook for Fed futures, the market is betting that the Fed may make one more hike before closing the show in this period of tight monetary policy.
As we saw with the banking crisis last month, that plan can change quickly. It’s a macro environment of a truly unprecedented nature, a combination of high inflation and generationally accelerated rate growth, albeit coming from such a low base.
The heyday of risky assets will come again, it is just a question of when. In the short term, it’s hard to say, but regardless of sentiment, don’t expect bitcoin to remain dormant for too long.