Crypto has become less volatile than stocks, does this mean the bottom has already been touched

After months of volatility and price declines, it seems that the crypto market has entered a phase of stagnation.

During the past month, the prices of many major cryptocurrencies have remained trapped in an increasingly narrow range. Since September 15, bitcoin has fluctuated within a narrow range of $2,350 that appears to be narrowing over time. Ethereum, the second-largest cryptocurrency, has shown a similar decline in volatility, bouncing between levels of $1,400 and $1,200 over the past month.

According to the Crypto Volatility Index (CVI), crypto entered a highly volatile period on May 7, just before the UST stablecoin lost its dollar parity and entered a ‘death spiral’, sending shockwaves across the market. The CVI currently shows a reading of 65.99, not far from the all-time low of 50.41, which was set on March 31, 2019.

The effect is so pronounced that bitcoin has become less volatile than some traditional stock indices. For example, during the past month, bitcoin traded in a range of 9.4 percent, compared to a range of 10.35 percent for Nasdaq100. Additionally, stock market volatility, measured by the S&P volatility index, recently recorded a new all-time high compared to Bitmex’s historical bitcoin volatility index, highlighting the magnitude of the decline in volatility of the largest cryptocurrency.

There are several reasons why crypto volatility has decreased. The most prominent contributing factor is the lack of trading volume in the crypto market. According to data from Blockchain.com, the total trading volume in dollars on major bitcoin exchanges reached a 30-day average low of 143.5 million dollars, the lowest level since November 2020. When there are fewer purchases and sales of bitcoin, it often results in more muted price movements.

However, broader macroeconomic factors are likely also playing a role in the relative stability of bitcoin’s price. Uncertainty in global markets continues to weigh on traditional stocks. The monetary tightening regime of the Federal Reserve aimed at reducing inflation has worried many market participants about the long-term damage such actions could have on the financial system. Yields on U.S. Treasury bonds have risen in recent weeks, signaling a lack of confidence in the government’s ability to repay its debts.

Since bitcoin and other cryptocurrencies are not directly tied to the traditional financial system, they may have avoided some of the problems plaguing other financial assets such as stocks and bonds. Additionally, since the June crypto crash forced many large holders to exit the market, those who still hold crypto are likely not inclined to sell anytime soon. While these factors explain the lack of sellers, they may also affect potential buyers. Grim macroeconomic outlooks will cause those looking to buy to patiently wait for signs that the worst is over.

Is bitcoin ‘bottom in’?

The recent lack of volatility has prompted many to wonder if bitcoin has hit bottom around its current price.

One way to help assess whether bitcoin has hit bottom is to compare the current market state with that of the crypto winter of 2018. In 2018, the price of bitcoin sharply fell during the first half of the year, from a high of 17,176 dollars on January 5 to a low of 5,768 dollars on June 24. The next four and a half months saw the price of bitcoin stagnate, attempting to break upwards but failing to fall below the June low. However, when that level was breached in mid-November, it resulted in a capitulation event that brought bitcoin down to a cycle low of 3,161 dollars.

Surprisingly, a similar situation is currently unfolding in 2022. Bitcoin reached a local low of 17,636 dollars on June 18 and has failed to break below it, despite several attempts. Setting everything else aside, a direct price comparison between the 2018 bear market and the current one would suggest that, like in 2018, another final drop is yet to occur.

However, merely comparing price action does not tell the whole story. Considering the relative trading volume between the 2018 drop and today provides a more comprehensive picture. Compared to 2018, the trading volume of bitcoin on major exchanges is already far lower than at the same point in 2018. It could be that forced selling triggered by the collapse of the Terra ecosystem and the bankruptcy of Three Arrows Capital in June accelerated capitulation and helped the market drop sooner than in 2018.

Several technical indicators that are currently absent also gave certain signals during the 2018 bear market. Net unrealized profit/loss (NUPL), pi cycle bottom, and Puell multiple have already reached levels in the cycle that have historically marked the bottom. It is important to note that these metrics have proven accurate so far, as the market has failed to break its June low. It is possible that the longer the market stays above the June low, the more confident investors will be that the bottom is in. This could encourage buyers and result in a partial market recovery similar to what happened in 2019.

Still, for this scenario to have any chance, bitcoin would need to remain strong throughout November. While bulls will argue that there is a chance for growth leading up to the midterm elections in the U.S., it seems that bears still have control due to rising inflation and poor global macroeconomic outlooks.

However, judging by the current lack of volatility, we will soon find out whether a similar capitulation to that of 2018 will occur.