The Last Time Volatility Was This Low Bitcoin Went On to Rally by $2K

For the fifth straight week, bitcoin is locked in a low-volatility squeeze similar to one seen ahead of a sudden $2,350 rally in October 2019.

While the cryptocurrency has leapt over 4% in the past 24 hours, prices still remain trapped between $9,000 and $10,000. In fact, the top cryptocurrency by market value has spent the better part of the last two months trading in that narrow range, according to CoinDesk’s Bitcoin Price Index.

Due to the persistent lack of clear directional bias, the Bollinger bandwidth, a price volatility gauge, has declined to 0.08, the lowest level since mid-October 2019.

Bollinger bands are placed two standard deviations above and below the 20-day moving average (MA) of price. Meanwhile, the Bollinger band width is calculated by dividing the spread between the volatility bands by the 20-day MA.

Bitcoin witnessed a bull-bear tug of war in the range of $7,700–$8,600 for over three weeks, starting from Sept. 26, 2019 (above right). As volatility fell, the Bollinger bandwidth declined to 0.08 on Oct. 17.

A prolonged period of low-volatility consolidation often paves the way for a big move in either direction, according to technical analysis theory. That’s what happened in four days after Oct. 17. The cryptocurrency suffered a minor drop from $8,000 to $7,300 on Oct 22-23 only to rise sharply to $10,350 by Oct. 26. Essentially, prices rallied by $2,350 in the nine days following the volatility gauge's drop to 0.08.

Over the past two years, there have been a number of instances where a below-0.10 reading on the bandwidth indicator marked a sudden explosion in volatility.

The sudden upswings in prices seen in early January 2020 and April 2019 were both preceded by a drop in bandwidth to below 0.10.

It's important to note, of course, that prolonged consolidation only promises big moves, and does imply anything about the ultimate direction of prices. In the past, bouts of low-volatility trading have ended with big price slides, too.

So, if history is a guide bitcoin may well break out of its restricted trading range over the next few days.

In traditional markets, options traders often take "straddles" in a bid to profit from an impending strong directional move following a dull trading environment. The non-directional strategy comprises buying both calls (bullish bets) and puts (bearish bets). Goldman Sachs, for example, likes straddling when stock volatility is low.

While the future direction of prices is uncertain, with central banks taking unprecedented steps to counter the coronavirus-induced recession with massive stimulus packages, the fundamentals may be aligned in favor of a big bullish move.

Further, investors look to be adding bets to position for a rally in the cryptocurrency, according to options market data.

“The Chicago Mercantile Exchange appears to be stepping up its options presence as we’re seeing some larger orders come into the market with mainly call buying from 11k-13k one to three months forward,” said Chris Thomas, head of digital assets at Swissquote Bank.

Disclosure: The author holds no cryptocurrency assets at the time of writing.