Bitcoin's Volatility Below Equities: Boon Or Bane?

Considered to be one of the most volatile asset classes in existence, cryptocurrencies have been in a rather deep state of slumber since May 2022 when central banks across the world started raising interest rates to thwart the impact of high inflation.

Major cryptocurrencies such as Bitcoin BTC/USD have been emblematic of this trend, with prices correcting by over 70% from all-time highs and currently trading at a critical support level.

In comparison, the S&P500 Index has dropped by almost 25% from its recent peak and has performed better than Bitcoin in the same period.

Yet, with Bitcoin's 30-day volatility and daily trading volumes falling to levels last seen in December 2020, crypto investors seem confounded by its price-volatility action.

Making matters worse is the fact that more than 20% of the companies included in the S&P500 Index have displayed greater volatility than Bitcoin, without the same cut in valuations that the world’s largest cryptocurrency has witnessed in the last one-year period.

Also Read: Ethereum Liquidations Hit $759M Since The Merge. What Lies Ahead?

But Isn’t Lower Volatility Better For Bitcoin And Other Cryptocurrencies?

Generally speaking, asset classes witness low price volatility when they are consolidating at important resistance or support levels. This signifies a maturation of trading activity, with weaker hands giving way to investors with a stronger risk appetite and a more positive outlook toward future price appreciation potential.

However, when combined with other parameters such as the overall trend, daily trading volumes and retail investor participation, a more complete picture can be arrived at.

In Bitcoin’s case, the trend has been extremely bearish over the last 10-month period, with every rise being sold on multiple occasions.

In terms of trading volumes too, Bitcoin's average daily trading volumes are a far cry away from those recorded in 2021. Combining both factors, it can be easily surmised why retail investors have been the worst affected in terms of sentiment, with a study by crypto firm Grayscale Investments highlighting that 55% of Bitcoin investors began their journey in 2021.

This is corroborated by data from Coinbase Global Inc COIN, one of the largest crypto exchanges by trading volume, which stated only 24% of its entire trading volume in the first quarter of 2022 was contributed by retail investors. 

Have Institutional Investors Changed the Game for Bitcoin? 

Despite an overall drop in crypto trading volumes in 2022, the share of institutional investors has been on the rise since the last four quarters, if going by Coinbase’s results.

Even in the muted first quarter of 2022, institutional investors contributed to 76% of the platform’s total trading volume.

While data for individual cryptocurrencies such as Bitcoin aren’t available, it is fair to assume similar percentages would be warranted for what is the most popular cryptocurrency in the world today. 

Moreover, institutional investors are generally considered to be in for the long run, as they tend to hold onto their assets, even through periods of high volatility or heavy price corrections.

The latter aspect is what unfolded in the second quarter of 2022 when Coinbase’s results for the quarter showed Bitcoin accounted for 31% of all transaction revenue.

Bitcoin’s healthy share is a testament to the fact that while the entire crypto market grinds slowly through this corrective phase, matured investors will continue to wager bets on Bitcoin, considering its position as the top crypto.

And institutional investors are definitely holding onto their Bitcoin positions, even if their overall value has taken a beating in the recent past.

A Sharp Rally Ahead or a Further Fall?

Even avid crypto fans are being spooked by the diverging price predictions floating on the internet today.

While crypto evangelists are still sticking to their "Bitcoin at $100,000 by December 2022" prophecies, technical analysis hints at the $30,000 mark being the first real hurdle.

Obviously, this is considering that Bitcoin doesn’t fall below the $18,500 support level it has honored in the last few months, below which the gates could really open for lower levels. 

While it is impossible to predict how Bitcoin or any other cryptocurrency could fare in the near future, it is important for investors and traders to watch the global financial markets for clues.

If inflation continues to rear its ugly head, the U.S. Federal Reserve could be forced to follow on with its interest rate hiking spree, squeezing further liquidity out of risky asset classes such as cryptocurrencies.

On the other hand, any dovish outlook could spur a rapid short-covering rally, to the delight of battered crypto investors. Either way, the ball has been set in motion and time will tell who will emerge victorious at the end of 2022.

Next: Will The Rise Of Quantum Computing Be A Threat To Bitcoin?

Don't miss Future of Crypto by Benzinga on Dec. 7 in New York City. Click here for more information. 

Photo: jantsarik via Shutterstock