Bitcoin volatility hits three-year low, could this be a sign of a bull market?

This article is from Cointelegraph, original author: Joseph Young

Odaily Planet Daily Translator | Nian Yin Si Tang

Since early May, the price of Bitcoin has been stagnant in a narrow range between $8,500 and $10,000. For most of the past month, Bitcoin has remained between $9,000 and $9,500, with realized volatility falling to a three-year low.

According to crypto data provider Skew, Bitcoin volatility has dropped to levels not seen since 2017. Skew researchers said: "Bitcoin realized volatility is at a three-year low, Tesla is eating Bitcoin's lunch!"

Bitcoin's realized volatility has reached its lowest point in three years. Data source: Skew.com

Multi-year low volatility levels have raised expectations of large price swings during a strong rally in altcoins. In recent weeks, altcoins such as Chainlink (LINK), Tezos (XTZ), and Cardano (ADA) have outperformed BTC and ETH. For example, LINK hit a new all-time high in the second week of July, even as the crypto market remained stagnant.

Based on the increased demand for low-market-cap cryptocurrencies, traders generally expect Bitcoin's volatility to rise sharply. Skew data shows that open interest on major Bitcoin futures exchanges such as Bybit has gradually increased.

The open interest on BitMEX and Bybit rose to $650 million and $500 million, respectively, suggesting that futures traders expect volatility in the market soon. As various indicators point to a decisive move in the price of Bitcoin, four key macro indicators show an upward trend.

Many fundamental factors show bullish sentiment for Bitcoin. Data source: Glassnode

Bitcoin network hash rate hits all-time high

Data from Blockchain.com shows that the hash rate of the Bitcoin blockchain network hit a new high on July 8, reaching 125.99 EH/s, surpassing the historical high set in the first week of March before Bitcoin fell below $3,600 on Black Thursday.

Bitcoin’s hash rate quickly surged to new highs after the block reward halving on May 11. After the halving, miners mined fewer BTC and generated less revenue, but their mining costs remained the same. As a result, analysts expect the hash rate to decline for a relatively long time in 2020.

Indeed, after the halving, the hash rate dropped to 90.29 EH/s. But in less than two months, the hash rate hit a new high again, indicating that the mining industry is still healthy and the possibility of a death spiral is extremely low.

The Bitcoin blockchain network hash rate hits a record high. Data source: Blockchain.com

There are also concerns that a death spiral, a phenomenon that occurs when a majority of miners in the bitcoin network stop mining entirely, could occur. In theory, a death spiral could occur if mining becomes largely unprofitable for a short period of time.

But likely due to the flood season in Sichuan, China, which has reduced electricity costs, miners have recovered quickly from the halving pressure, reducing the likelihood of a sudden sell-off, which could ease the selling pressure on Bitcoin.

Long periods of tight range volatility have historically led to Bitcoin rallies

According to a chart published by Bitcoin trader Nunya Bizniz, Bitcoin prices have historically experienced longer periods of narrow range fluctuations following halvings, which has led to significant price increases in the past.

Currently, Bitcoin has entered a narrow range for the 10th week. The narrow ranges in 2012 and 2016 lasted 6 weeks and 15 weeks respectively. Both ranges led to sharp increases within a few months. Nunya Bizniz said on Twitter: "Bitcoin is Bitcoin. After the halving, sideways price fluctuations are the norm. Bitcoin has now entered its 10th week of narrow fluctuations. When will the price soar? Let's wait and see."

An expanding narrow range is considered a bullish trend as it sets the stage for a stronger rally. When BTC bounces within a short-term range, it is prone to a sharp pullback.

Hash Ribbon Buy Signal Confirmed

On July 13, Charles Edwards, a digital asset manager at Capriole, said that the much-anticipated Hash Ribbons buy signal had been confirmed. Edwards, who created the indicator, tweeted: “This signal is particularly special after the halving. It may be a long time before the next one. The big bull run has begun.”

Hash Ribbons, this indicator shows the changing trend of Bitcoin hash rate and the health of Bitcoin mining ecosystem by quantifying the relative growth rate of hash rate. The specific value is the difference between the average value of Bitcoin hash rate in the past month and the average value of the past two months, divided by the average value of one month.

The indicator predicts potential miner capitulation by evaluating hashrate, thereby finding Bitcoin lows. The indicator is based on the theory that BTC tends to bottom after miners sell off, or after the BTC hash rate reaches a low. Both the new high in Bitcoin hash rate and the confirmation of the Hash Ribbon buy signal indicate that miners have gone through a selling phase.

Significant growth in HODLing activity

The “HODLwave” chart, created by cryptocurrency investor Willy Woo, shows the growth of new demand for Bitcoin. At market bottoms, HODLwave tends to grow as new money enters the market. Woo explains the model on his website: “The upper contour represents supply (old coins that have not moved) and the lower contour represents new demand (new coins that have recently moved). The combined view clearly shows that every bull cycle brings new demand.”

The "HODLwaves" indicator shows new capital flowing into the Bitcoin market. Data source: Woobull.com

Various data show that long-term Bitcoin investors are increasingly holding onto Bitcoin as new investors continue to pour into the market. This suggests that Bitcoin may be in an accumulation phase, with both existing and new investors foreseeing a long-term bull run.

Alistair Milne, chief investment officer of Altana Digital Currency Fund, said that the increase in HODLing activity indicates a bullish trend for Bitcoin. Similarly, Rafael Schultze-Kraft, chief technology officer of on-chain market analysis company Glassnode, agreed based on on-chain data: "The proportion of Bitcoin supply that has not moved for more than a year has reached 62%. The proportion of BTC supply in a profitable state is as high as 77%. Many investors can profit by cashing out, but they choose to HODL. How can you not be bullish on Bitcoin?"

External variables

Glassnode researchers found that external market forces appear to be slowing down Bitcoin’s upward trend, as the firm’s Liesl Eichholz, who oversees growth strategy, noted: “External market forces, such as systemic uncertainty and unknown correlations with traditional markets, may prevent BTC from breaking out at this stage, but the signal remains strong.”

As Cointelegraph reported on July 15, technical indicators suggest that the U.S. stock market rally is overheated. If stocks fall, Bitcoin could become increasingly vulnerable to a near-term correction given the recent correlation between Bitcoin and stocks.

The external risk is that a potential pullback in the US stock market could lead to a decline in risk appetite for assets. However, the combination of record high hash rates, rising HODLing activity, hash belt buy signals, and Bitcoin’s historical price patterns have many investors optimistic about Bitcoin’s performance in the fourth quarter of 2020.