Bitcoin (BTC) has had a remarkable month in February. The cryptocurrency surged past the $50,000 milestone, generating excitement among even the most cautious investors. The positive sentiment surrounding Bitcoin has led to predictions of the cryptocurrency reaching $100,000. However, it is important to temper this excitement and take a closer look at the rally.
Upon closer examination, it becomes clear that the current rally is largely driven by psychological factors. The bigger picture suggests that we can expect more of the dull price action that preceded it. Furthermore, 2024 is likely to be different from the euphoria of 2021.
The cryptocurrency market has a tendency to gravitate towards round numbers, and this is particularly true for Bitcoin. On February 9, two significant figures were announced. Firstly, Bitcoin spot ETFs, which serve as a gateway for traditional finance institutional investors to enter the cryptocurrency market, reached $10 billion in assets under management in less than a month of trading. Secondly, the S&P 500 index hit a historic milestone of 5,000 index points, driven by big tech and finance. However, it is important to consider what lies beneath these price moves.
Before the recent spike, Bitcoin was trading within a relatively tight range of 1-2%. This cautious market behavior can be attributed to several factors, including the Securities and Exchange Commission’s indecisiveness regarding BTC spot ETF options, the classification of Ethereum (ETH) as a security or a commodity, and the Federal Reserve’s reluctance to lower interest rates.
While these macro factors play a role, it is essential to take a broader perspective. Looking at Bitcoin’s realized volatility over the years, it becomes evident that narrow ranges and caution are not just a reflection of the current environment but a sign of steady progress towards stability. Realized volatility measures the extent to which an asset’s price has deviated from its average price over a given time frame, with higher levels indicating greater risk. In the case of Bitcoin and Ethereum, realized volatility has been declining.
In 2021, BTC’s realized volatility consistently hovered above 100% on a weekly basis, reaching peaks as high as 140%. However, over the past year, it has typically remained under 60%. Ethereum followed a similar pattern, with realized volatility reaching nearly 300% in May 2021 but consistently staying below 60% over the past 12 months. On a monthly basis, both cryptocurrencies experienced even lower deviations, ranging between 30% and 50%.
While the classification of volatility as low, moderate, or high depends on various factors, a range of 10% to 30% is generally considered moderate. Bitcoin and Ethereum still have a way to go before they can be compared to assets like Apple stock in terms of volatility. However, the fact that we are seeing realized volatility approach the moderate range indicates that we are moving in that direction.
Although psychologically significant round numbers and macro factors may trigger price reversals in the short term, any sharp spikes will likely 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 climb to new heights will be gradual as volatility gives way to stability.
This perspective does not dampen the recent bullish sentiment but rather provides a sober outlook on current events. It calls for a celebration of the coming-of-age of the cryptocurrency market, where patience and a focus on stability are crucial. Bitcoin and Ethereum are entering a new normal characterized by consistently calm price action.
Lucas Kiely, the Chief Investment Officer for Yield App, believes that as a mature market, it is time to curb excessive enthusiasm and embrace a more patient approach. Kiely brings extensive experience from his previous roles in asset management and trading, making him well-equipped to provide insights into the cryptocurrency market.
Disclaimer: This article is not intended to provide legal or investment advice and should be used for informational purposes only. The views expressed are solely those of the author and do not necessarily reflect the opinions of Cointelegraph.