Bitcoin Volatility Heading towards Saturation

  • Option markets whereby traders can bet against price fluctuations are reaching levels last seen in March when the rate had collapsed below $4,000.
  • The immediate price movement expectations are also at extreme ends, suggesting daily exchange rate swings of 10% or more.

The pace at which Bitcoins are touching new heights, it is almost certain that traditional investors will consider Bitcoin investment in their portfolios. Though, with the recent unprecedented volatility levels, large pension funds and traditional investors would keep Bitcoin investments at bay in the short run.

In a single day, the volatility has been to the tune of $10,000 before settling at astronomical levels of $35,000. The ructions are coming at a time whereby Bitcoins has been the top-performing assets in a pandemic year. Though the idea of a potential bubble has been brewing, the interest levels of hedge funds and private investors have peaked in at a time when investment quantity has been very large due to their deep pockets and risk appetite.

Considering the level of volatility and the past performance, one can safely assume that cryptocurrencies might be attractive to speculative investors but not for safe-haven assets or those considering portfolio diversification. The below image indicates the Bitcoin volatility in the past one week highlighting the possible turmoil that may take place in the immediate future.

[Source: Bitcoin Volatility]

Is Bitcoins Leading to Another Bubble Burst?

Due to the turmoil in the global economy and bitcoin performance steering away from any fraud or reputational dangers, predominantly large hedge funds and family offices have taken interest in this market. Though private side allocation has increased, institutional appetite is still lacking.

New investors believe that Bitcoins do provide protection against inflation and gradually rise with the Central Banks aggressive stimulus programme

Expectations of Bitcoins as a suitable tool for it to move in tandem with other financial asset. However, the level of volatility impacting the performance has led to Bitcoins being termed as “not a hedge for equity investments” since the price of stocks and cryptocurrency tend to move in the same direction.

Despite all the pros and cons, certain high-profile investors are bullish and any declines are an indication of a buying opportunity for those unable to cash in on previous gains. 

On the other side of spectrum, certain fund managers believe the bitcoins prices are ‘vulnerable to setback’ and this was the best time to exit the market.

One can safely assume that with the current level of volatility, its hedge funds and family offices willing speculate the performance hoping to maximise their returns in a short span of time. Risk averse investors and portfolio diversification still seems to be a while away for Bitcoins as wild swings in prices would not be the first choice for such investors. Thus, the current scenario may not be a bubble but it will surely not attract the level of customers as it anticipated.

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