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Is Volatility In The Bitcoin Price Coming Soon?

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The below is an excerpt from a recent edition of Bitcoin Magazine Pro, Bitcoin Magazine’s premium markets newsletter. To be among the first to receive these insights and other on-chain bitcoin market analysis straight to your inbox, subscribe now.

Lack Of Volatility

One of the concerning dynamics in the market right now that we want to focus on is the lack of volatility. The high period of spot volume activity and relatively lower derivatives activity has really done little to move the price and bear markets are known for testing market participants’ patience when it comes to duration. We got some volatility with the most recent Consumer Price Index (CPI) inflation print, but bitcoin’s historical volatility is still at record lows.

Now, everyone wants to see this bitcoin price range break one way or the other; a larger range accumulation usually leads to a larger breakout move. It’s really something to see bitcoin’s historical volatility below the United Kingdom gilt market, but now it’s even below the average equity and bond ETF. This is when you know the market’s completely flipped around. Either that speaks to a lack of interest in bitcoin right now with a much larger move brewing or bitcoin’s entire asset profile has changed all of a sudden. We lean towards the former and history has shown that this record-low level of volatility doesn’t last long and has led to some pretty significant price breakouts and breakdowns.

Even implied volatility in the market via options pricing is at some record lows (and falling) across different durations.

Source: Glassnode

In the four significant events of low-percentile historical volatility, we’ve seen three moves of upside breakouts and one significant down move to new lows back in 2018. It’s a small sample size from which to draw directional conclusions but a big move seems to be coming soon and the 2018 price analogue is one we’ve discussed before — especially given our expectations that the S&P 500 sees lower lows from here before this cycle is over. To quote a previous piece, “What To Expect When You’re Expecting Volatility”:

“While the lack of recent volatility in bitcoin could be a sign that much of the leverage and speculative mania of the bull market has been almost entirely washed out, our eyes remain on the outsized legacy markets for signs of fragility and volatility, which could serve as a short/intermediate-term headwind.”

Bitcoin’s volatility index

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Sam Rule

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October 21, 2022
Bitcoin Faces The Liquidity Steamroller Of Global Markets

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The below is an excerpt from a recent edition of Bitcoin Magazine Pro, Bitcoin Magazine’s premium markets newsletter. To be among the first to receive these insights and other on-chain bitcoin market analysis straight to your inbox, subscribe now.

Liquidity Is In The Driver Seat

By far, one of the most important factors in any market is liquidity — which can be defined in many different ways. In this piece, we cover some ways to think about global liquidity and how it impacts bitcoin.

One high-level view of liquidity is that of central banks’ balance sheets. As central banks have become the marginal buyer of their own sovereign debts, mortgage-backed securities and other financial instruments, this has supplied the market with more liquidity to buy assets further up the risk curve. A seller of government bonds is a buyer of a different asset. When the system has more reserves, money, capital, etc. (however one wants to describe it), they have to go somewhere.

In many ways that has led to one of the largest rises in asset valuations globally over the last 12 years, coinciding with the new era of quantitative easing and debt monetization experiments. Central bank balance sheets across the United States, China, Japan and the European Union reached over $31 trillion earlier this year, which is nearly 10X from the levels back in 2003. This was already a growing trend for decades, but the 2020 fiscal and monetary policies took balance sheets to record levels in a time of global crisis.

Since earlier this year, we’ve seen a peak in central bank assets and a global attempt to wind down these balance sheets. The peak in the S&P 500 index was just two months prior to all of the quantitative tightening (QT) efforts we’re watching play out today. Although not the only factor that drives price and valuations in the market, bitcoin’s price and cycle has been affected in the same way. The annual rate-of-change peak in major central banks’ assets happened just weeks prior to bitcoin’s first push to new all-time highs around $60,000, back in March 2021. Whether it’s the direct impact and influence of central banks or the market’s perception of that impact, it’s been a clear macro driving force of all markets over the last 18 months.

There is a global attempt to wind down central bank balance sheets

At a market cap of just fractions of global wealth, bitcoin has faced the liquidity steamroller that’s hammered every other market in the world. If we use the framework that bitcoin is a liquidity sponge (more so than other assets) — soaking in all of the excess monetary supply and liquidity in the system in times of crisis expansion — then the significant contraction of liquidity will cut the other way. Coupled with bitcoin’s inelastic illiquid supply profile of 77.15% with a vast number of HODLers of last resort, the negative impact on price is magnified much more than other assets.

One of the potential drivers of liquidity in the market is the amount of money in the system, measured as global M2 in USD terms. M2 money supply includes cash, checking deposits, savings deposits and other liquid forms of currency. Both cyclical expansions in global M2 supply have happened during the expansions of global central bank assets and expansions of bitcoin cycles.

We view bitcoin as a monetary inflation hedge (or liquidity hedge) rather than one against a “CPI” (or price) inflation hedge. Monetary debasement, more units in the system over time, has driven many asset classes higher. Yet, bitcoin is by far the best-designed asset in our view and one of the best-performing assets to counteract the future trend of perpetual monetary debasement, money supply expansion and central bank asset expansion.

It’s unclear how long a material reduction in the Fed’s balance sheet can actually last. We’ve only seen an approximate 2% reduction from a $8.96 trillion balance sheet problem at its peak. Eventually, we see the balance sheet expanding as the only option to keep the entire monetary system afloat, but so far, the market has underestimated how far the Fed has been willing to go.

The lack of viable monetary policy options and the inevitability of this perpetual balance sheet expansion is one of the strongest cases for bitcoin’s long-run success. What else can central banks and fiscal policy makers do in future times of recession and crisis?

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Sam Rule

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October 20, 2022
Where Will The Bitcoin Price Bottom?

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The below is an excerpt from a recent edition of Bitcoin Magazine Pro, Bitcoin Magazine’s premium markets newsletter. To be among the first to receive these insights and other on-chain bitcoin market analysis straight to your inbox, subscribe now.

CPI Volatility Doesn’t Disappoint

In the last article, we highlighted a potential for CPI to surprise to the upside and bring more volatility — and that’s exactly what we got and more. We won’t cover the components that drove the surprise in detail since we already highlighted much of that, but the key takeaway is that Core CPI came in hotter than expected at 6.6% year-over-year and 0.4% month-over-month with shelter (rent, housing components, etc) and medical services as key drivers. This is the fastest rate of change in annual headline Core CPI since 1982. To compare the various components over the last three months, check out this chart.

As for the rates, the latest implied federal funds rate from the eurodollar market shows a peak just above 5% in March 2023 before any rate cuts happen at the end of the year.

Where’s The Bitcoin Price Low?

With a fall to $18,000 inching closer and bitcoin facing risks of new year-to-date lows, it’s worth taking a look at a few key bottom price levels to gauge where the price may end up. First, let’s look at the fixed volume range profile of bitcoin since the December 2018 bottom of last cycle. The overwhelming majority of traded volume in the market occurred right around $10,000, also a key psychological level. In a strong downward move, $10,000 is a place where many in the market have their spot cost basis and could start feeling some real drawdown pain or lack of conviction.

In terms of bear market and cycle duration, let’s revisit the cyclical drawdown chart for bitcoin in current and previous cycles. Currently, we’re right around a 72.23% drawdown from an all-time high closing price of $67,589. If we are going to see a max cycle drawdown come in less than the last two cycles — let’s say around 80% — then we’re looking at a price around $13,500. If we assume that this cycle and popping of valuations will be much worse, let’s say around 85%, then we’re looking at a price around $10,100. The bull case is that we’ve found a durable bottom at $18,000 and we won’t see the max drawdown reach beyond 73%.

From an on-chain perspective, one of the more interesting realized price areas is the realized price held by the cohort of addresses that have 10-100 BTC. Recall that realized price is an estimate of the average cost basis based on the price when UTXOs last moved. This particular group accounts for around 22.6% of all circulating supply. This group would certainly reflect a decent portion of long-term holders and there’s a case to be made that in a deep, prolonged bear market, long-term holders have yet to feel the pain or capitulation that we’ve seen in the past.

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Sam Rule

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October 14, 2022
Preparing For The CPI Reading: Market Braces For Volatility

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The below is an excerpt from a recent edition of Bitcoin Magazine Pro, Bitcoin Magazine’s premium markets newsletter. To be among the first to receive these insights and other on-chain bitcoin market analysis straight to your inbox, subscribe now.

Markets Prepare For CPI Surprise

The U.S. Producer Price Index (PPI) data was released on October 12, 2022, a day before the highly anticipated consumer price index release the following morning. In short, it’s not a good sign for those expecting a below-consensus CPI beat. Although headline PPI is coming down, the month-over-month (MoM) growth came in higher than expected at 0.4% (consensus: 0.2%) and the headline annual change came in at 8.5%. PPI has less of an impact on immediate market moves compared to the CPI as it doesn’t account for inflationary costs being passed on to the end consumer. Still, it’s an inflationary measure that gauges if businesses are facing accelerated prices and tends to move in the same direction as CPI.

CPI consensus is 0.2% MoM so an overshoot of even 10 basis points could send the market into another significant downwards move, killing any Federal Reserve pivot hope left.

Monthly percentage change in producer price index and consumer price index

Annual percentage change in producer price index and consumer price index

This is not the only sign in favor of a higher-than-consensus CPI print. Previously, we mentioned the Cleveland Fed Inflation Nowcasting data which projects a 0.32% headline CPI MoM change and 8.2% headline annual change. That said, 17 of the last 19 nowcasting forecast reports were actually under the CPI reading. Recently this tool has been closer than most consensus forecasts but consistently underestimates the actual CPI data. When the more conservative CPI forecasters are predicting a consensus beat, tread cautiously.

Although PPI data can give us an idea of the CPI direction, they don’t move the markets like CPI data has over the last year. A key metric to watch for what the market is thinking is the U.S. 2-year Treasury yield, currently just shy of 4.3%. As of today, the latest upward momentum is stalling and is on pause, which can signal that the market is not quite ready to buy the latest Fed comments on rate hikes to 4.5% until they see the CPI print.

2-year Treasury bond yields continue to rise

Where CPI lands relative to consensus is anyone’s guess, but the markets look to be waiting for their next direction until that data comes out. The main medium-term concern, beyond the data, is still that Core CPI will stay at a 5-6% annual growth rate for many months. As it lags heavily, rent inflation is a major component that will likely further increase before turning over. Medical care services is also a component that rose significantly in August and continues to do so as it’s more affected by stickier labor costs that are also rising. Despite oil’s rise over the past two weeks, energy may be less of a short-term factor in the September data as commodities continue to turn over. But the latest oil prices could easily come surging back amid OPEC production cuts and winter shortage demand approaching.

What Does It Mean For Bitcoin?

In our last piece, we emphasized the lack of historical volatility in the bitcoin price right now. This won’t last and the market is wound up for a fairly volatile move one way or the other. The CPI print could easily be that catalyst. If we’re to see a move to the upside, our framework is still that the move will be a temporary rally to blow out leveraged shorts, take liquidity and likely reverse back to the downside. A large CPI surprise could send the market on a trajectory to test a lot of liquidity and stop losses just below $18,000. That’s the surprise CPI bear case. Again, look to the equities market direction to determine the short-term trend.

With all of this said, the game is now patience. As monetary policies continue to prove ineffective and/or completely destructive, bitcoin will still be here. Many will realize it never “died” and it will have a place in the world beyond a high beta correlation.

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Sam Rule

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October 13, 2022