Bitcoin’s Volatility Index Near Record Lows: Stable BTC Price Good Or Bad?
Bitcoin is famous (infamous?) for its volatility. Many cryptocurrency users are surprised to learn, however, that bitcoin’s volatility is nearing an all-time low.
That’s right: as of June 12, 2018, the bitcoin volatility index sits at around 3%. In the past week, the index has dropped below 3% for the first time in over a year, which indicates that bitcoin’s price is less volatile – and more stable – than it’s been in 12 months.
The last time bitcoin’s volatility dropped below 3% was in May 2017. Since then, the index has constantly remained above 3%. That changed this past week.
Bitcoin’s volatility is still far away from its all-time lows, however. Bitcoin’s volatility has dropped below 1% at various points in its history. Bitcoin reached an all-time low of 0.81% on the volatility index in October 2016, for example.
What happened to bitcoin’s volatility? Why is bitcoin suddenly so “stable” (relatively speaking)? Well, last year was a record year for bitcoin. Bitcoin went mainstream. The market exploded with growth throughout the year, then catapulted to unforeseen heights in November and December before collapsing during the first few months of 2018.
In December, bitcoin was a few hundred dollars below $20,000. Today, bitcoin has sunk to a low of around $6,500.
What Happened To Bitcoin’s Volatility?
Where has bitcoin’s volatility gone?
Think about it. Last year, there were plenty of latecomers to the cryptocurrency rally. There was enormous hype surrounding bitcoin. People were buying bitcoin without understanding it. Everybody wanted a piece of the world’s most popular cryptocurrency.
Then, all of this “easy money” disappeared. Markets dropped. Members of the general public who followed the hype and purchased bitcoin at prices above $10,000 got burned. Many of these people sold their bitcoin at a loss. Some have vowed never to buy back into bitcoin. Others, of course, are still sitting on their bitcoin.
The general public, meanwhile, is constantly bombarded with headlines about how bitcoin’s price continues to plummet. They see stories about bitcoin reaching a new one month low. Some people have already called for the death of bitcoin. All of these headlines push the general public – and their accompanying volatility – away.
Also remember that Facebook and Google have banned cryptocurrency advertisements, pushing the public away even further.
And, as a corollary, Google searches for bitcoin have dropped 75% in 2018 compared to 2017, indicating a shift in interest away from the general public.
One final reason why bitcoin’s volatility has been reduced is because of bitcoin futures contracts. The listing of bitcoin futures contract calmed some of the wilder market moves. The first bitcoin futures contract launched in the first week of December 2017. Within a few weeks, the price of bitcoin was falling – and continued to fall.
Futures contracts gave investors the ability to “sell short” and profit from the falling price of bitcoin. Nevertheless, even activity in bitcoin futures markets have dropped off.
All of this information boils down to one simple reason: bitcoin’s volatility is lower today because the hype around bitcoin has slowed down.
Is The Lack Of Volatility A Good Or Bad Thing?
If you’re designing a perfect currency, you want limited volatility. You want the price of 1 BTC to be worth, say, 1,000 apples tomorrow, and you want that same 1 BTC to be worth 1,000 apples next year or ten years from now. This makes it the perfect medium of transfer.
Is volatility good or bad for the cryptocurrency industry? The lack of volatility is good for those who see bitcoin as a stable store of value and a reliable medium of transfer.
The lack of volatility, however, is bad for those who are attracted to bitcoin because of the hype, the wild market movements, and the big gains and losses.
Do you believe in bitcoin as a futuristic, powerful cryptocurrency? Or do you believe in bitcoin as a price-driven pyramid scheme fueled by hype? Depending on your answer, you’ll see bitcoin’s volatility as a good or bad thing.