After a period of struggle, Bitcoin’s price managed to cross the $17,000 level over the weekends, but the price graph shows that the asset has been trading relatively flat with low volatility through the first ten days of 2023. This behavior of the asset is nothing new and very typical during a bear market.
A recent report from Arcane Research, a research firm specializing in digital assets, commented on the stability of Bitcoin. The asset’s stability is reflected by the tranquility in the derivatives market and is driven by lower trading activity. Hence, this is also indicative of a reduction in speculative demand in the world’s largest cryptocurrency by market capitalization.
According to the report, Bitcoin’s 30-day volatility has sunk to June 2020 levels. While the asset’s price is relatively flat, its 30-day volatility level has touched the previous lows in 2013, 2015, 2016, 2018, 2019, and 2020.
In addition, Bitcoin, for the time being, has become more stable than gold, the dollar strength index, Nasdaq, and the S&P500 measured through 5-day volatility.
Interestingly, Bitcoin’s 5-day volatility has plunged below all indexes simultaneously; this phenomenon is commonly known as “relative volatility compression” and has happened only five times in the past. Previously, the relative volatility compression in Bitcoin lasted only 1-2 days.
However, the current relative volatility compression event has already set a new record by sustaining for four days, as per data. Hence, the research firm marks the current relative volatility compression as unusual.
Notably, apart from the relative volatility compression that took place on September 29 last year, all such events in the past have been followed by sharp volatility over the next 30 days. Therefore, there is a high chance that Bitcoin might see sharp fluctuations in the coming months.
Also, as per the report, the implied volatility of Bitcoin options has reached an all-time low with the current decline in Bitcoin volatility. This has made straddle strategies more attractive as investors can “utilize cheap options premiums to position for abrupt market moves.”
Investors often use implied volatility (IV) to estimate future volatility in a security’s price. However, while IV can predict price swings, it can’t predict the direction in which the price will go. High implied volatility means a high chance of a large price swing, while low IV means that the underlying asset’s price most likely won’t change.
While the volatility level has been low, whale investors have also registered low participation in the market. Todayq News reported that despite a risk reset in traditional markets, crypto whales, or huge traders, are avoiding the bitcoin (BTC) market due to the difficulty of conducting transactions without affecting the cryptocurrency’s price.
The observation came from the study of market depth, a metric of an asset’s price resilience to large orders relatively low in cryptocurrency, discouraging participation. According to analysts, the combined 2% BTC market depth has decreased by about 50%, from 14,000 BTC at the end of October to roughly 8,000 BTC.