Cryptocurrency volatility is gone. Does this mean that the bottom has been reached?

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An unresponsive crypto market could be a signal that prices have found a bottom.

Crypto Volatility Drops

After months of downward volatility, the crypto market appears to be stagnating.

Over the past month, the prices of many major crypto assets have remained trapped in an increasingly narrow range. Since September 15, Bitcoin has been hovering within a tight range of $2,350, which appears to be narrowing over time. Ethereum, the second largest cryptocurrency, has seen a similar drop in volatility, fluctuating between the $1,400 and $1,200 levels over the past month.

According to the Crypto Volatility Index (CVI), price movements are the most muted since May 7, shortly before the Terra blockchain’s UST stablecoin lost its dollar peg and entered a death spiral, sending shockwaves across the market. The CVI currently shows a reading of 65.99, not far from the metric’s all-time low of 50.41, which was set on March 31, 2019.

The effect has been so pronounced that Bitcoin has become less volatile than some traditional stock indices. For example, over the past month, Bitcoin traded within a range of 9.4%, as opposed to a range of 10.35% for the NASDAQ100. Additionally, stock volatility, as measured by the S&P Volatility Index, recently registered a 1.2% increase new all-time record compared to Bitmex’s Bitcoin Historical Volatility Index, highlighting the magnitude of the drop in volatility of the major crypto assets.

There are several reasons why cryptocurrency volatility has fallen. The most prominent factor is the lack of trading volume in the crypto markets. According to facts from Blockchain.com, total USD trading volume on the major Bitcoin exchanges has hit a 30-day average low of $143.5 million, the lowest level since November 2020. When less Bitcoin is bought and sold, it often results in a more moderate price movements.

But broader macroeconomic factors likely also play a role in Bitcoin’s relative price stability. Uncertainty in global markets continues to weigh on traditional equities. The Federal Reserve’s monetary tightening policy, aimed at reducing inflation, has many market participants concerned about the long-term damage such actions could have on the financial system. U.S. Treasury yields have soared in recent weeks, signaling a lack of confidence in the government’s ability to service its debt.

Because Bitcoin and other cryptocurrencies are not directly tied to the traditional financial system, they may have escaped some of the problems that plague other financial assets such as stocks and bonds. Furthermore, since the crypto crash in June forced many large holders to exit the market, those who still hold crypto likely have no inclination to sell anytime soon. While these factors explain the lack of sellers, they can also impact potential buyers. The bleak macroeconomic outlook will leave those looking to buy back their positions patiently waiting for a sign that the worst is over.

Has the Bitcoin Bottom Been Reached?

The recent lack of volatility has led many to wonder if Bitcoin has found a bottom around its current price.

One way to help assess whether Bitcoin has bottomed out is to compare the current state of the market to that of the crypto winter of 2018. In 2018, Bitcoin’s price fell sharply during the first half of the year, from a high from $17,176 on January 5 to a low of $5,768 on June 24. Over the next four and a half months, Bitcoin price traded sideways, trying to break out to the upside but unable to fall below the June low. However, when the low was finally challenged and broken in mid-November, it resulted in a capitulation event that took the top crypto to the cycle low of $3,161.

A surprisingly similar situation is currently playing out in 2022. Bitcoin hit a local low of $17,636 on June 18 and has been unable to get below that despite several attempts. Apart from everything else, a direct price comparison between the 2018 bear market and the current one could indicate that, as in 2018, one final leg down is yet to occur.

However, comparing price promotions doesn’t tell the whole story. Taking into account the relative trading volumes between the 2018 decline and today, this gives a more comprehensive picture. Compared to 2018, Bitcoin trading volumes on the major exchanges are already much lower than at the same point in 2018. It could be that the forced selling caused by the collapse of the Terra ecosystem and the bankruptcy of Three Arrows Capital in June, the capitulation has accelerated and helped push the market to the bottom faster than in 2018.

As I mentioned in a previous article on a potential market bottom, several technical indicators that were missing at a similar point in the 2018 bear market have also provided signals. Net unrealized gain/loss (NUPL), the Pi cycle bottomand the Puell Multiple have all already hit a once-in-a-lifetime cycle that has marked a historic low. It’s worth noting that these numbers have proven correct for the current cycle so far, as the market has failed to break the June low. It is possible that the longer the market stays above the June low, the more confident investors will be that the bottom has been reached. This could encourage buyers and result in a partial market recovery, similar to what happened in 2019.

But for this scenario to have any chance of success, Bitcoin would need to remain strong throughout November. While the bulls will argue that there is a chance of a rally ahead of the US midterm elections, the bears still appear to be in control due to rising inflation and the poor global macroeconomic outlook. All things considered, not much has changed since we last looked at the possibility of a market bottom in July. But judging by the current lack of volatility, I expect that sooner or later we will find out if there is a final step back before the current crypto winter.

Disclosure: At the time this piece was written, the author owned ETH, BTC, and several other cryptocurrencies.

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