Bitcoin (BTC) has had a fantastic month in February, surpassing the $50,000 milestone and igniting excitement among even the most cautious investors. The rally has drawn comparisons to the 2021 bull run, leading to predictions of Bitcoin reaching $100,000. However, it is important to temper this excitement and take a closer look at the current rally.
Upon examination, it becomes clear that the current rally is largely driven by psychological factors. The bigger picture suggests that we will experience more of the slow and steady price action that preceded it. Additionally, the year 2024 is expected to be different from the euphoria of 2021.
The affinity for round numbers in markets, particularly in the crypto space, is well-known. In early February, two significant figures were announced. Firstly, Bitcoin spot ETFs reached $10 billion in assets under management in less than a month of trading. Secondly, the S&P 500’s “big tech and finance” segment reached a historic milestone at 5,000 index points. However, the underlying factors behind these price moves tell a different story.
Before the current spike, Bitcoin was trading within a relatively tight range of 1-2%. This cautious market behavior can be attributed to various factors, such as the Securities and Exchange Commission’s indecisiveness on BTC spot ETF options, the uncertainty regarding whether Ethereum is a security or a commodity, and the Federal Reserve’s reluctance to lower interest rates.
However, looking at the realized volatility of Bitcoin over the years, it becomes apparent that narrow ranges and caution are not just a reflection of the current environment. Instead, they indicate a steady progression towards stability, contrasting with the wild fluctuations of the previous bull cycle.
Realized volatility is a statistical measure of how much an asset’s price has varied from its average price over a given time frame. Higher levels of realized volatility indicate greater risk. In the case of Bitcoin and Ethereum, their realized volatility has been declining. In 2021, BTC consistently had realized volatility above 100% and even reached peaks as high as 140%. Over the past year, it has typically remained under 60%. Ethereum has followed similar patterns, with realized volatility reaching nearly 300% in May 2021 but consistently staying below 60% in the past 12 months.
On a monthly basis, both cryptocurrencies have experienced even lower deviations, generally ranging between 30% and 50%, and occasionally dipping into the twenties. While the classification of low, moderate, or high realized volatility depends on market conditions and individual risk tolerance, a range of 10% to 30% is generally considered moderate. Apple stock, for example, falls within this category.
It is worth noting that Bitcoin and Ethereum still have a way to go before they can be considered moderately volatile assets like Apple stock. However, the fact that we are seeing realized volatility approach moderate ranges is a clear indication that we are heading in that direction.
While psychologically significant round numbers and macroeconomic factors will continue to trigger price reversals, any sharp spikes will be short-lived. This does not mean that Bitcoin and Ethereum won’t reach their respective $100,000 and $10,000 milestones this year. Rather, the climb to new highs will be gradual as volatility gives way to stability.
This analysis is not meant to dampen the recent bullish sentiment but rather to provide a sober perspective on the current events. As the crypto market matures, it is important to curb our enthusiasm and embrace the new normal of consistently stable price action for Bitcoin and Ethereum.