Volatility of bitcoin
What is the best way to predict volatility of bitcoin? In recent few days, this currency is dropping rapidly. I am seeking for expert advice about the factors that impact on the volatility of bitcoin.
This is a loaded question, and an age old problem in trading of markets - just not Bitcoin. There are a few methods to skin the cat. Also, volatility is a two way street, not just when markets correct lower that is not volatility. Markets can be volatile to upside too.
- Technical Analysis
- One of the best indicators is ATR (Average True Range)
- Next best one is the simplest Bollinger Bands - if you shoot above / below 2 sigma bounds in traditional markets (let us say $spx), you can expect markets to "reverse" sooner or later. For improving your timing to be trend following you can increase the BB standard deviation to 3 sigma (for strong markets which Bitcoin is to upside)
- Just Google around and you will find additional TA indicators for ascertaining volatility. Here is one link for starters - https://www.investopedia.com/ask/answers/032715/which-market-indicators-reflect-volatility-stock-market.asp
- Cycle Theory - for this you will need to master Elliott Wave Theory and have an understanding of Time & Cycles for a particular asset class. In general most volatility occurs in w4's (Wave 4 after the Wave 3 top). And from a Cycles point of view - larger the Cycle degree, larger the Volatility - case in point 2007 Market top was a manifestation of a cycle that relates to 1929 top. This is a complex subject, and can be learned only by school of hard knocks and a lot of research
- Fundamental Analysis has a role to play in it as well but it will get reflected in TA indicators - so I am going to leave this one alone - as this can be a can of works, and can start religious wars :-)
Hope this helps!
I am no expert by any stretch of the imagination.
In my view, the tech behind Bitcoin or any other cryptocurrency of the blockchain is here to stay. Federal banks and financial institution will start to use Blockchain technology. Bitcoin's intent is to disrupt the conventional way accounting and the money movement around the world. They are much larger forces at play to not let that happen, imagine the entire forex trade destroyed or the US dollar losing its acceptability globally. In addition in a world trying every trick in the hat to curb terror funding crypto currencies thwart that initiative. In long run (in my view), the Cryptocurrency will find a way to be part of our financial ecosystem. The volatility will continue in the short to medium term and there might be some opportunities there as more and more people get exposed to blockchain technology
Hope you find my 2 cents useful
Hitesh - here's a Hot Take from Crypto Mike.
A quick note, I see you are referring to bitcoin as a currency, but the CFTC actually defines bitcoin as a commodity. Furthermore, bitcoin doesn't have the liquidity, fungibility, or transactional capacity to be considered a currency and because of this some people refer to it as "digital gold" (also a commodity and not a currency).
Here are some leading and lagging bitcoin volatility indicators, in order of importance, that an expert could use to "predict" the volatility in bitcoin.
"Supply & Demand" as indicated by factors such as:
- supply distribution (both in tokens and the ratio of "smart/dumb money", % of hodler+buy the dip people) supply inflation rate, and circulating supply vs total market supply
- market sentiment, media campaigns, fear uncertainty doubt (well-founded or otherwise)
- barriers to selling such as technological or blockchain level issues like congestion/slow speed/high cost transactions, exchanges restricting new user registrations or otherwise discontinuing service (DDoS attack, too much traffic, etc), censorship/adversarial environments
- market cycle/seasonality, tax, regulatory, & compliance landscape
- Leverage trading markets
- Bitcoin marketcap dominance %
- Adoption metrics on the blockchain like number of transactions, hashrate, block weight, # of wallets/users
- Adoption metrics off the blockchain like exchange registrations/revenue, formation of new markets, infrastructure scaling, points of sale/use cases, google search trends/analytic data
Starting from the top, the current token supply distribution of bitcoin suggests low volatility (defined as movements less than 50% - much lower than bitcoin's turbulent past) because the circulating coin supply is significantly more distributed than previously in bitcoin's history, which provides a price stabilizing effect. The deflationary supply rate (both from the negative supply inflation rate and supply permanently lost to user error) and "hodl + buy the dip" mentality also suggest low volatility.
The market sentiment is high, gone are the days of CNBC wondering if bitcoin is a scam. Cryptocurrency in general is shown positively in the media ("white market bitcoin") and fear, uncertainty, and doubt is at low levels thanks to lambo ambitions, lightning networks being marketed as panaceas, and new paradigm thoughts. These factors appear to suggest low volatility.
Barriers to selling are very high in the current market from the bitcoin high-fee, slow, and low transactions & withdraws, closed exchange registrations/exchange arbitrage opportunities. The market cycle is in a mature state that has been tested with a small number of black swan type events like exchange hacks, regulatory attempts, etc. 2018's closing of the 1031 like-kind exchange tax loophole suggests a heavily skewed ratio of investors vs short term traders, and the increased regulatory laws suggest low volatility.
In summary, while bitcoin may be dropping in price quickly relative to traditional financial markets, this is actually a very low volatility time for bitcoin relative to previous bitcoin corrections. The volatility is so low for example (less than 50% price movements), that low leverage margin traders are unlikely to be liquidated.
To me the volatility of Bitcoin is almost not predictable. The cyber currency has no association with any authority or physical representation, external factors (e.g. recent statements from Chinese Central Bank officer) could have a big sudden impact on this.
Several studies were attempted but I don't think anything 100% reliable is set up. E.g. here it is with one example of these studies, https://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=SBF2017&paper_id=56.
Hitesh, one key indicator that many digital asset gurus use is daily transaction volume vs. network value. The daily on-chain transaction volume has shown a strong correlation with the network value and thus bitcoin price over time.
When you overlay the charts, they have a strong tendency for the curves to close their spread after phases of separation. We are in one of those separation phases right now, but if the past is an indicator, as long as the transaction volume is increasing (which it is), you can be relatively certain that this is a good buying opportunity and that the curves will close in on each other again.
Bitinfocharts is a good source for this information, but there are others you can google to overlay the two plots.
I’ve been asked about Bitcoin a lot lately. I’ haven’t written anything about it because I find myself in an uncomfortable place in agreeing with the mainstream media: It’s a bubble.
Bitcoin started out as what I’d call “millennial gold” – the young (digital) generation looked at it as their gold substitute.
PS: If a bitcoin "expert" did exist - would s/he be here?
17 months ago
VIX not VICKS
AKA “The Fear Gauge”
The CBOE Volatility Index, known by its ticker symbol VIX, is a popular measure of the stock market’s expectation of volatility implied by S&P 500 index options, calculated and published by the Chicago Board Options Exchange (CBOE). It is colloquially referred to as the fear index or the fear gauge.
According to Wikipedia, the formulation of a volatility index, and financial instruments based on such an index, were developed by Menachem Brenner and Dan Galai in 1986 and described in academic papers. The authors stated the “volatility index, to be named Sigma Index, would be updated frequently and used as the underlying asset for futures and options. … A volatility index would play the same role as the market index play for options and futures on the index.”
In 1986, Brenner and Galai proposed to the American Stock Exchange the creation of a series of volatility indices, beginning with an index on stock market volatility, and moving to interest rate and foreign exchange rate volatility. In 1987, Brenner and Galai met with Joseph Levine and Deborah Clayworth at the Chicago Board of Options Exchange to propose various structures for a tradeable index on volatility; those discussions continued until 1991.
The current VIX concept formulates a theoretical expectation of stock market volatility in the near future. The current VIX index value quotes the expected annualized change in the S&P 500 index over the next 30 days, as computed from the options-based theory and current options-market data.
But, what about bitcoin and related crypto-currencies?
17 months ago