Opinion | Bitcoin price may see significant fluctuations in early December

The price of Bitcoin (BTC) faces two key events following the weekly and monthly closes on Dec. 1. The upcoming weekly close is particularly noteworthy as it could be the first red week since late September.

The monthly line will be significant because if the Bitcoin price holds above $13,791, it will set the highest closing price in Bitcoin's history.

Bitcoin volatility Source: Cointelegraph Markets, Digital Assets Data

There are three key factors that could cause Bitcoin volatility to spike on the weekly and monthly closes. These factors are the general uncertainty surrounding BTC prices, record futures trading activity and open interest, and an overly bullish weekly chart.

Meanwhile, despite the rebound in Bitcoin prices from around $16,500 on November 28, traders have turned cautious and expect a pullback in the near term.

There are two key trends that could drive Bitcoin’s recovery. First, Guggenheim Investments, a global asset management firm with more than $233 billion in assets under management, has secured the right to invest $500 million in the Grayscale Bitcoin Trust.

In the United States, where Bitcoin exchange-traded funds (ETFs) do not yet exist, the Grayscale Bitcoin Trust is the first entry point for most institutional investors. Deribit reported that the news triggered a large amount of buying activity in the options market. The company said:

“Bitcoin bounced $2,000 off its lows after reports of Guggenheim Macro Opps seeking to allocate $500 million were released over the weekend. The quiet weekend options market was ignited.”

Second, high net worth investors and whales may have bought the dip in anticipation of Monday’s move. As quantitative traders point out, most buyer demand has come from the United States in recent weeks.

Some speculate that the demand comes from the time-weighted average price (TWAP) algorithm commonly used by institutions and funds. Since the TWAP algorithm will be activated again on Monday, it may increase buyer demand for Bitcoin.

Traders are often unsure of Bitcoin’s price direction

There is a high level of uncertainty in the cryptocurrency market right now, with traders divided over where prices will move next.

Some believe that Bitcoin may have bottomed out over the weekend due to market trends. For example, BlockTower head of trading Avi Felman said that on Coinbase, Bitcoin’s recent pullback has resulted in Bitcoin moving into the hands of stronger holders.

Overselling can occur during bull markets, especially because traders often look for reasons to sell. As a result, overleveraged buyers get caught at the highs, leading to massive liquidations. But when traders expect more downside and sentiment reaches a low, Bitcoin tends to recover. Felman explained:

“Bitcoin rebounded quickly after a massive sell-off on Coinbase. To me, this is a sign that retail is slowly coming back. The switch from weak hands to strong hands has been quite noticeable in the last 48 hours. Pullbacks in a bull market always give you a massive reason to sell.”

Additionally, various technical indicators suggest that Bitcoin is neither overbought nor oversold on shorter time frames.

For example, on the daily chart, Bitcoin’s relative strength index (RSI) is around 55. An asset is considered oversold if it drops below 35. Therefore, Bitcoin is in an awkward position because, like the weekly chart, the high time frame chart is still overbought.

This has led traders to predict that the $13,000 to $14,000 support range could see a correction soon. This high level of uncertainty in the market could lead to increased volatility as new weekly and monthly lines are set to open.

Open interest on futures exchanges is likely to rise again, increasing the likelihood of large price moves.

Whales become more active in Bitcoin futures

Throughout the Bitcoin rally in recent weeks, trading activity on major Bitcoin futures exchanges has been increasing. Despite the recent decline, open interest on top futures trading platforms remains above $1 billion. When open interest is high, the likelihood of a short or long squeeze increases, which can lead to a significant spike in volatility.

Bitcoin futures trading volume Source: Cointelegraph Markets, Digital Assets Data

The Chicago Mercantile Exchange (CME), in particular, has seen a notable increase in Bitcoin futures trading activity. Interestingly, Arcane Research reports that the number of large traders with minimum holdings of more than 25 BTC has more than doubled in 2020.

Arcane researchers explained that this trend indicates an increase in institutional demand for Bitcoin. CME’s increasing trading activity, accredited investors and institutional investors may lead to increased short-term volatility due to excessive trading volume. The researchers said:

“Large traders hold at least 5 futures contracts equal to at least 25 BTC (5 BTC per contract). The average for 2019 was 45 large traders, without any significant growth throughout the year. However, this number has doubled in 2020, and two weeks ago we saw a new record of 102 large traders. This is perhaps one of the best signs of increasing institutional demand for Bitcoin exposure, and we already know that investors like Paul Tudor Jones are part of this growing group at CME, which is currently the second largest futures market for Bitcoin.”

Although demand for Bitcoin has been rising among institutional investors, the futures market remains a major source of volatility.

Cointelegraph reported earlier this week that when Bitcoin dropped from $19,400 to $16,200, Binance Futures alone saw over $400 million worth of futures contracts liquidated due to a massive liquidation.

The new weekly line is a big variable

Bitcoin is set to see a new weekly line in the next 48 hours, but on the weekly time frame, the variable remains overbought.

The RSI on the weekly chart is 88 and an asset is considered overbought when its RSI is above 75. The weekly chart is also significantly above the shorter-term moving averages (MAs), namely the 5-day, 10-day, and 20-day MAs.

BTC/USDT weekly chart (Binance) Source: TradingView.com

Traders had been expecting a correction as the weekly chart was overextended. If Bitcoin consolidates above the short-term moving average, it would make the rally more sustainable as it would give time for the derivatives market and spot buyer demand to catch up.

Furthermore, Bitcoin’s monthly chart is even more so than its weekly chart. The 5-day MAs, 10-day MAs, and 20-day MAs are $13,129, $10,778, and $9,685, respectively, which are significantly lower than the current market price.

But it remains uncertain whether technical factors alone will cause Bitcoin to correct in the foreseeable future. If institutional buyers like Guggenheim continue to make headlines by entering the Bitcoin market, it could attract more buyers and retail investors in the short term.

Historical Bitcoin volatility Source: Highcharts

First, historically, Bitcoin prices have been very volatile in December. While volatility was relatively low in December 2019, late 2017 and late 2018 saw wild price swings, including all-time highs near $20,000 and bear market bottoms, respectively.

If a similar scenario plays out, Bitcoin prices could see significant volatility by the end of the year.