Cryptocurrencies: early signs of a return of volatility

Clear signs of a significant increase in volatility in crypto markets are emerging these days. 

The volatility of Bitcoin (BTC) returns

The Bitcoin Volatility Index clearly shows that starting in December 2022, BTC’s 30-day price volatility began to decline. 

At first, it returned to the levels before the FTX collapse, but then continued to fall. 

The lowest peak in volatility for this period occurred between 7 and 8 January, which was before the price returned above $17,000. Since then the price has risen to $17,400, a +3% increase accumulated in just over two days. 

It is worth noting that it had previously registered another +3% since late December. 

Volatility levels as low as those of 7 and 8 January had not been seen since October 2016, because in the previous post-bubble bear market (that of 2018-2019) they had never dropped so low. 

Therefore a possible increase in volatility was in the air, and indeed in the last few days three times the price of Bitcoin has given a clear signal of an increase in volatility.

Since this is an index that is calculated on the average of the past 30 days, the increase in volatility over the past three days has not yet appeared clearly on the graph of the Bitcoin Volatility Index, but the signs that it may increase again in the coming days are there. 

Ethereum and its volatility

A similar argument can be made for the Ethereum Volatility Index, although it still has higher values than Bitcoin. 

However, the low levels of volatility for the price of ETH made on 9 January are all-time lows. 

The price of ETH has always been more volatile than that of BTC, but back in October, its volatility had also dropped a lot. 

As with Bitcoin, the collapse in volatility was there after the settlement following the FTX fiasco, but in the past two days, it has shown clear signs of reversing the trend. 

In fact, five times in the past seven days the price of ETH has given clear signs that its volatility may be increasing. It is enough to consider that since the December lows, it has already risen 14%. 

The bottom of the crypto market

One of the most interesting things is that this is an increase in volatility because of price rises, and not because of a drop as was the case in early November. 

In November, BTC hit a 2022 price low, while ETH came close. 

Since then there has been a clear rebound, although still not enough to say with certainty that the bottom of this bear market was reached in November 2022. 

It is also worth noting that the eventual end of the bear market does not at all mean that a new bull run will definitely begin, because it would only mean the end of the downtrend, which could also be followed by a commonplace period of lateralization, or a period of slightly upward lateralization. 

Thus on the one hand, it might appear that the bottom is now behind us, but on the other hand, there is nothing to prevent further collapses. Moreover, even if it were behind us, there seems to be no sign of a new bull run beginning any time soon. 

However, the increase in volatility thanks to a rise in prices remains a good sign, not least because it occurred in the absence of any major positive news, and in a climate that is actually still quite bearish. 

The other cryptocurrencies

However, it is not only BTC and ETH that are showing signs of increased price volatility in recent days. 

There are nearly thirty altcoins among the top 100 that are showing similar signs. 

It is enough to mention that in the past seven days, BNB has posted +8%, Cardano‘s ADA +19%, Litecoin +8%, and Solana +15%, and this is among the top twelve alone. 

Prominent among the other top 50 were Lido DAO with +36% and Aptos with +33%. 

Total crypto market capitalization rose from $790 billion at the end of December to over $850 billion, an 8% increase in less than two weeks. 

This is not such a resounding increase as to indicate the end of the bear market, but at least it indicates that 2023 has started better than how 2022 ended. 

It is also worth keeping in mind that, for tax reasons, those who were at a loss and wanted to write off capital losses from taxes prefer to sell before the end of the year in order to avoid deferring the discharge of capital losses to the following year. 

This means that when markets are down sharply, selling increases at the end of the year precisely for this reason, and consistently it stops after the start of the new year.

Indeed, those who sell at the end of the year to unload capital losses will sometimes then decide to buy back in the new year. 

If such a dynamic is of significant size, it can affect price trends. 

Risk appetite

However, the key point is another, namely the apparent return of risk appetite in financial markets. 

This is demonstrated by the Dollar Index (DXY), or the value of the US dollar against other major currencies. 

Indeed, the dollar is the ultimate safe haven during crises in the financial markets, and for two months now the DXY has been falling sharply. 

However, looking at the Nasdaq 100 index, for example, it appears that this risk appetite has returned only very recently, that is, only since 6 January. 

It remains to be seen whether this is a steady return, perhaps due to the start of the new year, or whether it will turn out to be just a flash in the pan.