In bitcoin, volatility is your friend

What does changes in bitcoin’s price volatility imply about its future trend?

“The price is very volatile” is one of the things some people say when trying to discredit bitcoin.

But, is volatility a bad thing? When is bitcoin’s price more volatile? What does changes in bitcoin’s price volatility imply about its future trend?

Let’s try to answer these questions by visualizing price and some volatility indicators together.

The chart below shows bitcoin’s price (dark blue circles) and a volatility indicator (light blue line at the bottom of the chart). I’ll explain the gray and red vertical lines later.

The volatility indicator can be read as follows:

  • Extremely high volatility, when the indicator is above the upper dashed orange line,

  • Extremely low volatility, when the indicator is below the lower dashed orange line.

  • The solid orange line in the middle represents “normal” volatility.

From the chart we can see that:

  1. Extremely high volatility is mostly associated with market tops and a few important price corrections as the bottom of the 2018-2019 bear market and the March 2020 pandemic selloff. These are signaled by the red vertical lines.

  2. Extremely low volatility is typically reached before a big price movement, as a signal of a price bottom, or as a continuation of a trend. These are signaled by the gray vertical lines.

  3. Volatility mostly increases along with price. This support the saying that bitcoin is volatile to the upside.

  4. Right now we are in a normal-volatility period, after a period of increasing volatility when bitcoin increased towards $64k.

Another volatility indicator can signal good times for bitcoin accumulation and also market tops. The chart below shows this.

  • Zones of accumulation are shown by the gray vertical lines, when this volatility indicator turns negative (extremely low volatility).

  • Price tops are signaled when the indicators turns red, showing extremely high volatility.

  • This indicator has decreased to 0.05 currently from a top of 1.23 back in February when bitcoin was above $50k.

Returning to our initial questions, is volatility a bad thing? I would say it is not, as it increases within each cycle along with price gains.

When is bitcoin’s price more volatile? Mostly at market tops, after significant price appreciation.

What does changes in bitcoin’s price volatility imply about its future trend? Accumulation has been better at low levels of volatility and this is typically reached before a big price movement.