Bitcoin (BTC) has had a fantastic month in February, surpassing the $50,000 milestone and igniting excitement among investors. However, while many are making bullish predictions of Bitcoin reaching $100,000, it’s important to approach this rally with caution. A closer look at the current market indicates that the recent surge is largely driven by psychological factors. In reality, we are likely to experience a period of boring price action similar to what we saw before, and the market in 2024 will be different from the euphoria of 2021.
One interesting observation is the market’s preference for round numbers, which is even more pronounced in the crypto world. On February 9, there were two significant announcements involving round numbers. Firstly, Bitcoin spot ETFs, which serve as a gateway for traditional finance institutional investors to enter the crypto 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 at 5,000 points, mainly driven by big tech and finance companies. However, it’s essential to delve deeper into the underlying factors behind these price movements.
Before the recent spike, Bitcoin had been trading within a relatively narrow range of 1-2%. This cautious trading behavior can be attributed to several factors, such as the Securities and Exchange Commission’s indecisiveness on BTC spot ETF options, the uncertainty surrounding Ethereum’s classification as a security or commodity, and the Federal Reserve’s reluctance to lower interest rates. While these macro factors have some validity, a more comprehensive analysis reveals that the narrow trading ranges and cautious sentiment reflect a steady progression towards stability, in stark contrast to the wild fluctuations of the previous bull cycle.
Realized volatility, which measures an asset’s price variation from its average price over a specific time frame, can be used to assess the associated risk. For Bitcoin and Ethereum, realized volatility has been declining. In 2021, BTC’s realized volatility consistently remained above 100% and even reached as high as 140%. However, over the past year, it has generally stayed below 60%. Ethereum exhibited similar patterns but at higher ranges, with realized volatility peaking at nearly 300% in May 2021. Nevertheless, it has also consistently decreased and now hovers below 60%. Monthly deviations for both cryptocurrencies have been even lower, generally ranging between 30% and 50%.
While the classification of low, moderate, or high realized volatility depends on various factors, a range of 10% to 30% is typically considered moderate. Apple stock, for example, falls within this category. Bitcoin and Ethereum still have a way to go before they can be classified as moderately volatile assets and compared to Apple stock without raising eyebrows. However, the fact that we are witnessing realized volatility approaching moderate ranges is a clear indication that we are moving in that direction.
While round numbers and macro factors will continue to influence price reversals, any sharp spikes will likely be short-lived. This is not to say that Bitcoin and Ethereum won’t reach their respective milestones of $100,000 and $10,000 this year, but rather that the climb to new heights will be gradual as volatility gives way to stability.
This assessment should not dampen the recent bullish sentiment but rather provide a sober perspective on the current situation. As the crypto market matures, it’s time to temper our excitement and embrace the new normal of consistently stable price action for Bitcoin and Ethereum.