Key Points
- Bitcoin (BTC) has had a strong February, surpassing the $50,000 mark, but the rally may be largely psychological.
- Bitcoin and Ethereum (ETH) are showing signs of progressing towards stability, with declining realized volatility.
The month of February has seen a significant surge in the value of Bitcoin (BTC), with the cryptocurrency breaking through the $50,000 milestone.
Despite a 2% dip following the January CPI report, the mood among investors remained upbeat, with many drawing parallels to the 2021 bull run and predicting Bitcoin could reach $100,000.
Caution Amidst the Excitement
However, it's important to approach this optimism with caution.
A closer look at the current rally suggests it may be more psychological than substantive, and the broader outlook suggests a return to the more mundane price action that preceded the rally, with 2024 potentially looking quite different from the euphoria of 2021.
Markets, particularly cryptocurrencies, have a tendency to gravitate towards round numbers.
On February 9, two significant figures were announced: Bitcoin spot ETFs, a key entry point for traditional finance institutional investors into cryptocurrencies, hit $10 billion in assets under management in less than a month of trading, and the S&P 500 reached a historic 5,000 index points.
However, the story behind these price moves may be different.
In the days leading up to the current spike, Bitcoin was trading within a relatively narrow range of 1-2%.
This could be interpreted as the market's cautious response to the Securities and Exchange Commission's indecision on issues such as whether Ethereum (ETH) is a security or a commodity, and the Federal Reserve's reluctance to lower interest rates.
However, this perspective may be short-sighted.
A look at Bitcoin's realized volatility over the years suggests that narrow ranges and caution are not just a reflection of the current environment, but a sign of a steady progression towards stability.
This is a stark contrast to the wild price swings of the previous bull cycle and appears to be a trend that is here to stay.
Realized volatility, a statistical measure of how much an asset's price has deviated from its average price over a given timeframe, is used to assess the risk associated with that asset, with higher levels indicating greater risk.
For Bitcoin and Ethereum, this has been on a downward trend.
In 2021, Bitcoin's realized volatility consistently hovered above 100% week-on-week, reaching highs of nearly 140%.
However, over the past year, it has typically remained under 60%.
Ethereum, which often moves in sync with Bitcoin, followed a similar pattern, with realized volatility reaching almost 300% in May 2021, but over the past 12 months, it too has consistently remained under the 60% mark.
On a monthly basis, deviations for both currencies were even lower, generally ranging between 30% and 50%, but also dipping into the twenties.
While what is considered low, moderate, or high realized volatility can vary depending on market conditions, the specific asset being analyzed, and individual risk tolerance, a range of 10% to 30% is typically considered moderate.
Apple stock, for example, falls within this category.
Although Bitcoin and Ethereum still have some way to go before they can be considered moderately volatile assets comparable to Apple stock, the fact that we are seeing realized volatility touch the moderate ranges is a clear sign that we are moving in that direction.
While significant round numbers and severe macroeconomic factors will continue to trigger price reversals for some time, any sharp spikes are likely to be quickly subdued.
This does not mean that Bitcoin and Ethereum will not reach their respective $100,000 and $10,000 milestones this year, but rather, that the ascent to these new heights will likely be a slow and steady process as volatility gradually gives way to stability.
This is not intended to dampen the bullish sentiment of recent days, but rather, to provide a sober perspective on current events that, while less thrilling than typical cryptocurrency "moon" predictions, calls for a recognition of the market's maturity.
As an almost mature market, it's time to temper our excitement and focus on patience.
A new normal characterized by consistently tame price action is here for Bitcoin and Ethereum.
Lucas Kiely, the chief investment officer for Yield App, where he oversees investment portfolio allocations and leads the expansion of a diversified investment product range, was previously the chief investment officer at Diginex Asset Management, and a senior trader and managing director at Credit Suisse in Hong Kong, where he managed QIS and Structured Derivatives trading.
He was also the head of exotic derivatives at UBS in Australia.
