Is The Price Of Bitcoin Becoming More Or Less Volatile After Security Breaches?

Bitcoin prices tumbled after news of yet another major crypto theft broke June 10.

Week after week in 2018, cryptocurrency investors have been hit by a stream of negative headlines about increasing regulation and cryptocurrency-related thefts, hacks and scams. But even in a market that's known for its volatility, the negative headlines don’t seem to be inducing as much extreme volatility as they have in the past.

Volatility Draining

Last month, a study by the Anti-Phishing Working Group revealed that a staggering $1.2 billion in cryptocurrency has been stolen in the past year alone, not including the 30 percent of digital currency recently stolen from Coinrail. Bitcoin prices initially dipped 10 percent in response to the news. But if the reaction seemed relatively muted compared to the volatile swings of late 2017, there may be good reason.

The price chart below of the NYSE Bitcoin Index is a measure of the 10-day standard deviation of the index. Standard deviation is a measure of market volatility that indicates the amount of variability an asset’s price has in relation to its average price.

The chart shows that bitcoin’s volatility has died down tremendously from its December 2017 peak. The NYSE Bitcoin Index’s 10-day standard deviation has dropped from nearly 3,000 to below 270 in that time. To confirm this drop in volatility, earlier this month, the Bitcoin Worldwide Index registered its lowest 30-day bitcoin volatility reading in over a year.

Stabilization Or Deterioration?

Bitcoin investors are hoping the decline in volatility is part of a longer-term trend of market stabilization that will encourage more investors to view cryptocurrencies as a safe haven investment similar to gold. Unfortunately, bitcoin has lost more than 50 percent of its value so far year-to-date, which isn’t exactly providing the type of value preservation investors are looking for.

Another more bearish possibility is that the 2017 bitcoin bubble is bursting right under investors' noses. When bitcoin prices were at their all-time highs in December, Georgetown University School of Business professor Jim Angel appeared on Benzinga’s PreMarket Prep trading show and warned cryptocurrency investors that the cryptocurrency bubble might not pop with a bang. Instead, it might simply deflate slowly over time, he said.

“During the dot-com bubble, when a dot-com baby came out with a bad earnings report, people realized the business model is broken, and the market responded swiftly and harshly."

Bursting Vs. Boredom

Since there is no clear evidence that can disprove the thesis that cryptocurrency is a store of value, there are no real bearish catalysts for the cryptocurrency market, Angel said.

“My prediction is that eventually boredom is what’s going to cause it to deflate,” Angel said.

“Once the people who are rushing in out of fear of missing out, the FOMO, see, ‘wow, OK, I got this thing, now what can I do with it?’ If the price goes nowhere, the speculators are going to say, ‘I’m bored, I’m going to sell it and take whatever profits or losses I have and move on.’ Eventually, I think it will kind of wither away.”

Bitcoin bulls are hoping this lack of volatility isn’t a sign of the market boredom that Angel referenced.

In a period of time in which cryptocurrencies were supposed to be demonstrating explosive growth, trading volume has died down tremendously. The chart below highlights how both the standard deviation and the trading volume in the Bitcoin Investment Trust GBTC have steadily declined since December 2017.

Not surprisingly, as trading interest has died down, the share price has slumped. The GBTC fund is now down 50.4 percent year-to-date.

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