Bitcoin’s volatility fell near an all-time low this week, and while the stillness of the price action these past couple months may be welcome, investors may not want it to last forever. Volatility has always been a key characteristic of the cryptocurrency. Lately, some investors have been comforted to see bitcoin react less to volatile macroeconomic events, especially as the stock market stayed highly sensitive to them. On top of that, bitcoin has been relatively stable in the wake of the FTX implosion, aside from an initial decline when the saga first began. That may seem like a good thing for long-term investors and would-be investors. After all, some traders have learned to use bitcoin’s volatility to their advantage. But according to Fidelity Digital Assets’ most recent study on institutional investors, issued in October, half of them said price volatility is in fact the greatest obstacle to investment. However, the low volatility is both a symptom and cause of traders staying out of the market, according to Noelle Acheson, economist and author of the Crypto is Macro Now newsletter. “This is not great for bitcoin’s outlook in that traders make the market more liquid and more lively, accounting for the bulk of on-chain movements as well as off-chain exchange moves,” she said. “An uptick in bitcoin volatility would, rather than trigger concern, be greeted as a positive sign and would most likely be closely followed by a similar move in spot and derivative trading volumes.” Matthew Sigel, head of digital assets research at VanEck, said the drop in volatility is “unsustainable” and likely to reverse. He attributed the change to a substantial decline in leverage in the market and low volumes keeping investors from making large directional bets. According to Coin Metrics, reported open interest in futures contracts, a measure of the current leverage in the crypto market, is the lowest it’s been since early 2021. Sigel also pointed to bitcoin miners who may be selling covered calls in order to monetize profits as much as they can. Bitcoin miners have had a difficult time with the bitcoin price stuck at such low levels. This week it floated around $16,000. With the market so depressed, the cost of mining a bitcoin can be higher than the price of a bitcoin, which is how miners are rewarded for their contributions to the network. For miners, selling their bitcoin to cover mining expenses or to capture greater gains (by selling at a price they consider to be overvalued) is sometimes necessary. Sigel said the volatility dynamic is exacerbated by miners trying to avoid this. Breaking out Lower volatility isn’t necessarily a sign that the asset class is maturing. But, to Sigel’s point, a reversal could be on the horizon. “Each time volatility has been this low, historically, bitcoin prices have bottomed,” said Alex Thorn, head of firmwide research at Galaxy Digital. Thorn said that while seeing lenders and exchanges collapse feels unstable, the crypto market will emerge from this period having significantly matured. For now, however, conditions are stagnant. “Flow is down, we’ve talked to clients that are trading gold instead of crypto right now,” Thorn said, adding a note of optimism. “It’s cyclical, it’ll be back,” he said. “We have seen some large investors that have been doing their homework and sort of felt they had missed the big run-up. They finally have actually come in and allocated because they have long-term conviction.” Tim Rice, co-founder and CEO of crypto market data provider Coin Metrics, said the current low volatility is good for the industry in that it gives skeptical investors an “interesting” entry point. He also said it shows there aren’t very big trends in one direction or the other. Some crypto investors embrace bear markets, known by many as “crypto winters,” thinking of them as episodes that flush out froth from the market and lay the groundwork for the next catalyst that they hope will drive the next rally. Right now, however, any potential innovation within the industry is overshadowed by the Federal Reserve’s unfinished campaign to raise interest rates. “Risk in general is just sitting and waiting on monetary policy,” Thorn said. “There’s plenty of reason and there will be plenty of catalysts for a decoupling [from stocks] to happen but really everybody’s just sitting on their hands trying to figure out where this thing is turning,” Thorn added.
