Time-Based Capitulation: Bitcoin Volatility Hits Historic Lows Amid Market Apathy
Time-Based Capitulation: Bitcoin Volatility Hits Historic Lows Amid Market Apathy
Interest in bitcoin is currently in the doldrums. The brunt of the price-based capitulation has already been felt, while the real pain ahead is a waiting game for the market to finally turn around.
Relevant Past Articles:
Time-Based Capitulation: Bitcoin Volatility Hits Historic Lows Amid Market Apathy
As we head into 2023, we want to highlight the latest state of bitcoin’s volume and volatility after a recent wave of capitulation. Last time we touched on these dynamics was in “The Bitcoin Ghost Town” in October, where we highlighted that an extremely low volume and low volatility period in bitcoin price, GBTC and the options market was a concerning sign for the next leg lower. This played out in early November.
Fast forward to today and the trends of declining volume and low volatility are back once again. Although this could be indicative of another leg lower to come in the market, it’s more likely indicative of a complacent and decimated market that few participants want to touch.
Even during the November 2021 capitulation period, there was a historically low period of volatility. Sometimes the most market pain can be felt when having to wait for a clear change in trends. The bitcoin price is providing that pain as we’ve yet to see the type of explosion in market volatility that has defined market pivots and major directional moves in the past. We were incorrect in our views that a pivot would come in 2022. The risk still remains for an overhang of broader equity market volatility (measured by the VIX).
Note that the bitcoin BVOL index is looking at past 30-day volatility while the VIX measures forward-looking volatility over the next 30-days.
We can turn to the much more nascent options market in bitcoin for a similar look at the implied (expected) volatility over the next 30-days. One-month implied volatility for bitcoin is at its lowest level in the history of the data — which only goes back to 2021.
The lack of expected volatility is not just a near-term expectation; six-month implied volatility is at its lowest recorded level as well. A simple explanation is that there just aren’t many large players left in the market, which were the source of the tremendous levels of volatility throughout the bull market.
Volumes across spot and futures markets are telling a similar story. While there are many different ways to define, classify and estimate bitcoin volume in the market, they all show the same thing: September and November 2021 were the peak months of action. Since then, volume in both the spot and perpetual futures markets have been in steady decline with a notch down in December and what looks like a continued trend headed into this month.
Overall market depth and liquidity has also taken a major hit after the collapse of FTX and Alameda. Their destruction has led to a large liquidity hole, which is yet to be filled due to the lack of market makers currently in the space. The market makers that weren’t wiped out are taking more precautions to keep assets further away from exchanges and are raising more cash instead of providing liquidity.
By far, bitcoin is still the most liquid market of any other cryptocurrency or “token,” but it’s still relatively illiquid compared to other capital markets since the whole industry has been crushed over the last few months. Lower market depth and liquidity means assets are prone to more volatile shocks as single, relatively large orders can have a greater impact on market price.
Source: Kaiko Q4 Report
Source: Kaiko Q4 Report
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Analysis: Whether moving averages over various periods is telling us if interest in bitcoin is increasing or decreasing.
What data shows about seller exhaustion and why this is an important signal.
Which other metrics might be important to watch over the coming weeks and months. 👀
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