Bitcoin’s inevitable return to volatility

Bitcoin has awoken from its long slumber, with volatility rocking the asset at the tail end of last week as Bitcoin fell swiftly from $29,000 to $26,000. 

Markets had been remarkably steady recently, with volatility close to all-time lows and Bitcoin rangebound around the $29,000/$30,000 mark. However, as we warned a couple of weeks ago, this is an asset set up for volatility and the aggressive price moves were always going to return. We saw that Friday. 

At 9:35 PM GMT on August 18th, Bitcoin even plummeted around 8% in a ten-minute span, spelling knock-on effects that had not been seen since the turbulent days of 2022. 

Bitcoin’s move should not be surprising

While the timing is impossible to forecast in a sector of the market that is notorious for its unpredictability, the fact that a move like this could happen was obvious when looking at the underlying market data. This is not to take a hindsight angle – as we said, the direction and timing of the move were certainly not easy to predict. But these sudden jerks in the Bitcoin price remain a certainty, even if the waters had been placid as of late. 

One of the most glaring reasons for this is liquidity. Market depth remains incredibly thin, meaning moves to both the upside and downside can be exacerbated. Shallow depth was a factor even before the FTX collapse, but with one of the most prominent market-makers in the space, Alameda, evaporating into thin air as part of the scandal, there has been a stark gap in market depth since. 

The below chart from Kaiko demonstrates this Alameda gap well (as well as the drop off in volatility that has occurred). 

On the other hand, liquidity and volumes in derivatives markets have been more resilient, albeit still low. Yet this can serve to also accentuate price moves in specific conditions. Cascading liquidations can significantly dent price as traders scramble – something that likely occurred amid last week’s action as over $1 billion was liquidated (looking at Coinglass data, the split was $844 million long traders and $196 million of short traders). 

In the past 24 hours , 174,892 traders were liquidated , the total liquidations comes in at $1.04 billion
Long
$843.83M
Short
$196.13Mhttps://t.co/C47AgBCcTk#BTC pic.twitter.com/TOL753FteD

— CoinGlass (@coinglass_com) August 18, 2023

Largest drop since FTX 

All in all, this was the biggest daily drop in the Bitcoin price in nine months, when markets panicked amid FTX’s startling demise. Friday’s fall of 7% was the largest move in either direction since March 17th, when Bitcoin rose 9.4% amid the Silicon Valley Bank crisis and a recalibration of expectations around the future path of interest rates. 

Looking at the volatility on an annualised basis shows a perceptible downward trend since the regional bank wobbles in March, with the rebound tangible last week. The macro environment is of course a factor as always, with yields moving sharply Friday and sparking the large move.

Bitcoin is now down to the level it last traded at in June. However, it is still having a tremendous year overall, outpacing nearly every risk asset and up 56% thus far. 

This is far from a disaster and life will go on, as it always does, for the asset. It is merely a reminder for those getting complacent in the crypto markets that volatility, at least right now, is essentially programmed into this asset. 

Not only are crypto-specific risks elevated compared to what most other asset classes face (as we have seen repeatedly in the last eighteen months), but the very fabric of the market structure is set up such that Bitcoin is vulnerable to such sharp moves. This is what makes it such a fascinating asset for traders, and why the relative absence of recent volatility had attracted so much attention. 

That is without even getting into the ongoing regulatory storm, of which there have been many twists and turns this year – a story which is far from over and will no doubt surprise again in the future. 

Finally, you have a largely unprecedented macro situation, with still-high inflation and severe recent tightening of macro conditions, yet unemployment close to record lows and economic data relatively resilient. This heightens the market’s sensitivity, which we saw in full force last week with the move in yields. 

Bitcoin is still Bitcoin, and that means volatility. Last week was a reminder that although it may have taken a break for a little bit, it’s still the same asset at heart. 

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