Bitcoin is known for its wild price swings. For many investors, this volatility is a source of anxiety and stress. One moment, Bitcoin's price is up; the next, it's down. Even for seasoned investors, Bitcoin volatility can be daunting and lead to costly mistakes. This article will help you understand Bitcoin's volatility and discover actionable strategies through bitcoin indicators to minimize the risks involved in investing for even the most skittish investors.
Bitcoin Magazine Pro's Bitcoin analysis tools can help you achieve these goals by breaking down Bitcoin's price movements and uncovering actionable trends to help you make informed and strategic investment decisions.
Why is Bitcoin Volatile? An Overview of Bitcoin Price Fluctuations
Volatility measures an asset's price fluctuations over its average price over time. When an asset experiences significant price swings, it is considered more volatile. Bitcoin has surged nearly 50x in the last five years but remains far more volatile than most other asset classes, including stocks and bonds. While volatility can signal the potential for above-average returns, it’s also one of the leading risk indicators, making Bitcoin investments unpredictable in the short term.
Factors Driving Bitcoin’s Wild Price Swings
Many factors contribute to Bitcoin’s volatility. Most of them relate to the currency’s nascency and the dynamics of the Bitcoin markets.
Investors regularly and drastically change their expectations for the currency based on world events, and the Bitcoin markets aren’t efficient enough to absorb these supply and demand shocks without significant impacts on the market. This can result in drastic changes in Bitcoin’s spot price.
Bitcoin’s Role Is Still Being Established
Bitcoin has only existed since 2009. In that time, it has gone from a small project with a dozen users to a reserve currency used by Fortune 500 companies. The world is still figuring out how Bitcoin will fit into the global economy, and sentiments about the currency are redefined regularly.
As lawmakers and financial institutions continue to address Bitcoin, their actions and statements can cause significant fluctuations in supply and demand. The price reflects investor expectations for Bitcoin's future, which is influenced by actions taken in the present.
Speculation Without Cash Flows
The nature of the asset exacerbates speculation around Bitcoin. Bitcoin’s value as an investment purely depends on its future value. Most assets are priced based on the future value of their cash flows. This might mean the dividends a stock will pay out or the coupons an investor receives from a bond.
There will always be some uncertainty around these cash flows. Still, they create a relatively straightforward method for modeling the asset's price, which creates a perception of lower risk among investors. Cash flows do not determine Bitcoin’s value. The price and demand depend on how Bitcoin is used in the global economy. This results in a much wider range of price projections, with every assumption drastically impacting price expectations.
Small Market Capitalization
The distribution of Bitcoin also plays a role in rapid price movements. The mechanics of trading depend on the supply and demand of the asset. Bitcoin gets much public attention, but its market capitalization is only ~$1 trillion, only 10% of gold’s market cap. This enables a single entity or wealthy individual to affect the price by buying or selling Bitcoin single-handedly.
Individual people or groups own large amounts of Bitcoin. If a large holder decides to sell, the currency supply quickly increases. Assets with lower market depth will require smaller capital to impact the market significantly.
Immature Markets
The smaller market and recent creation of Bitcoin mean that the markets and financial products that support Bitcoin need to be developed more. Bitcoin is complicated for investors to gain exposure to compared to assets like stocks. The smaller value of the market also yields less market depth for large traders.
Whereas a few major stock exchanges, such as the New York Stock Exchange, dominate the market, Bitcoin liquidity is fractured across many different exchanges. Most assets will offer a comprehensive set of derivatives and other ways of hedging or leveraging a position. However, Bitcoin derivatives products are only in their infancy, further constraining how investor exposure to Bitcoin can be managed. These derivative products will help smooth Bitcoin volatility as they evolve and mature.
Bitcoin’s Volatility Makes It a Risky Investment, Experts Say
Bitcoin’s volatility is among the factors that make it such a risky investment. Although bitcoin's price has roughly doubled in value since August 2023, its frequent price fluctuations undermine its reliability as a store of value or as a hedge against inflation, at least in the short term. Financial experts warn that this volatility makes bitcoin a poor investment choice for anyone with a lower risk tolerance.
What the Experts Say About Bitcoin's Price Swings
What do experts say about the risks associated with Bitcoin’s volatility? “It’s a very, very volatile asset,” venture capitalist Tim Draper said in a recent interview. “If you had bought some [Bitcoin] years ago and had held on to it, you would have made a fortune. You would have lost a fortune if you had bought it a year ago. That’s no way to plan for retirement.”
The Importance of Speculation In Bitcoin's Price
Without broader acceptance of Bitcoin as a currency, its value largely hinges on speculation and market sentiment rather than intrinsic value. This makes it a risky asset compared with other investments, like stocks or bonds, which carry their risks. “I view bitcoin as a commodity heavily influenced by market sentiment, without backing by tangible assets or government support,” says Jing Zheng, a CFP in Virginia. “In that regard, how does one even predict its value and volatility?”
Financial Planners Weigh In On Bitcoin's Investment Potential
Should it be part of your overall investment strategy? Financial planners differ in their opinions on if or how to incorporate it into your portfolio but tend to agree it’s a risky bet that shouldn’t be the basis for your retirement savings. “It’s important to distinguish between essential and discretionary investments,” says R.J. Weiss, a certified financial planner and founder of The Ways to Wealth. “Bitcoin should not be the cornerstone of your retirement plan.”
For most investors, a well-diversified portfolio that includes stocks and bonds will likely “provide the steady growth needed for retirement,” says Weiss.
Bitcoin: A Speculative Asset
Despite the risks involved, some financial planners see value in purchasing Bitcoin as a speculative asset, but only with money you’d be comfortable losing. Bitcoin has a limited supply, so it’s often seen as a commodity similar to scarce resources like gold. Gold has a long history as a reliable store of value and has various uses in electronics, dentistry, and jewelry. In contrast, bitcoin, created in 2008, is much more speculative as a commodity.
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Still Misperceived? Is Bitcoin Volatility Its Strategic Edge?
Bitcoin volatility gets a bad rap. Many look at its price fluctuations and see nothing more than chaos. This volatility presents strategic advantages, especially for traders.
The more erratic an asset's price movements, the more opportunities to profit from rapid buying and selling. Many traders specifically seek out volatile assets like Bitcoin for this reason.
Is Bitcoin’s Volatility a Function of Its Youthfulness?
Some say that Bitcoin’s volatility is a function of its youthfulness. As bitcoin persists, the story goes, its volatility will level off. Everyone will have heard of it, know the costs and benefits, and have decided whether to use it or not. Bitcoin is in price discovery mode, and when the price is discovered, that will be the end of the volatility.
But there is no guarantee of this. Since the beginning of the year, the price of gold has risen 28%, from $2,000 on 14 February to $2,663 on 24 September. Gold has been around for millennia yet retains some volatility.
The Role of Limited Supply in Gold's Volatility
It’s not purely being new that makes an asset volatile. One apparent reason for gold’s volatility is that demand fluctuates. For normal goods, when demand goes up, supply goes up too. From 2010, Apple went from producing 40 million iPhones yearly to creating over 200 million in 2024.
If they’d kept the supply at 40 million per year, the price would have gone up, as the 200 million people who wanted iPhones would have competed to purchase the scarce supply. The supply of new gold almost certainly cannot increase by 500% in a decade because it resides in the ground, and the process for getting it out won’t allow for such increases in discovery or extraction.
The Supply of Bitcoin: Predictable and Fixed
Bitcoin is even more resistant to large increases in supply than gold is. Mining produces new bitcoin, where specialized computing hardware attempts to solve a math problem by trial and error. The answer can be verified with one calculation, but there’s no way to determine whether a value is an answer other than trying it. The reward for providing a correct answer is a new Bitcoin.
Like gold, Bitcoin's value fluctuates. When Bitcoin's value goes up, it makes sense to dedicate more resources to mining. But like gold, the Bitcoin network resists a linear correlation between increased resources expended in mining and increased production. In the case of gold, this is due to the physical limitations of mining. In the case of Bitcoin, it’s due to the code, particularly the difficulty adjustment.
How Bitcoin's Mining Difficulty Adjustments Stabilize Block Production
The Bitcoin network has an algorithm governing block production; the target is one block every ten minutes. Every 2016 block, the difficulty of the math problem changes. The algorithm looks at how long the previous 2016 blocks took to mine. The ideal is two weeks. If the past 2016 blocks took less than two weeks, the math problem gets more brutal. If they take more than two weeks, the math problem gets more accessible.
When Bitcoin prices increase, miners can turn on more machines, use more electricity, and reap more rewards. But that will make the blocks come faster, giving them at most two weeks of faster block production. After that, the difficulty will adjust, and the supply schedule will resume as normal.
The Impact of Fixed Supply on Bitcoin's Price Volatility
This fixed supply schedule means that the price of bitcoin will always fluctuate as long as demand fluctuates. And demand will fluctuate. Demand for gold fluctuates, so the gold price fluctuates. Of course, gold is much more established, so people don’t react as strongly to demand fluctuations.
Even demand for government-backed currency fluctuates based on the country's economy. Demand rises when more people want the country’s exports. When people in the country would instead hold cash than other assets, demand rises. Governments can respond to this by creating more money, thus keeping the price of the money in terms of other currencies and goods and services. Bitcoin cannot.
Criticism of Bitcoin’s Volatility: Too Volatile to be Money?
Critics treat Bitcoin’s volatility as a negative. One argument is that Bitcoin is too volatile to be money. That is, bitcoin can never become a common medium of exchange because it’s too volatile. But this is a mistake. While volatility is in the negative column concerning money, bitcoin raises many things in the positive column, such as:
- Divisibility
- Fungibility
- Transportability
- Privacy
- Durability and more
These other features of Bitcoin more than compensate for its volatility. Most currencies slowly lose value over time. Many people may prefer volatility to upside and downside and an inevitable decline in value.
The Other Side: Why Bitcoin’s Volatility is a Positive
Price fluctuations are headline-grabbers. They keep the attention on bitcoin, even as it ages, without changing much. In many ways, bitcoin isn’t interesting. It’s just a protocol that has been working as it should for a decade and a half. 70% price drops and 500% price increases are interesting and keep people talking about Bitcoin. Each time, some people who haven’t used Bitcoin before are enticed into acquiring some.
Satoshi Nakamoto, the pseudonymous creator of Bitcoin, could have made Bitcoin without price volatility, either by pegging the value of Bitcoin to a government-backed currency or by implementing a mechanism for supply to respond to price. But Satoshi didn’t do that, saying in a P2P forum post that “would have required a trusted party to determine the value because I don't know a way for software to know a real-world value of things.” Satoshi chose volatility over trusted third parties. The result is far more interesting and, in my opinion, likely more successful.
Bitcoin Analytics Tools
Bitcoin Magazine Pro offers comprehensive analytics tools to help investors and enthusiasts better understand Bitcoin through data. The platform provides a wide range of free, regularly updated Bitcoin charts, each accompanied by detailed explanations to make complex information accessible.
For those looking to dive deeper, paid tiers offer features like chart alerts, exclusive indicators, and in-depth market reports.
Informed Decision Making
Whether you're a curious Bitcoin investor wanting to grasp the factors influencing Bitcoin's price or an analyst eager to expand your knowledge, Bitcoin Magazine Pro aims to provide clarity and insights to support more informed decision-making in the Bitcoin space.
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Should Investors Welcome Bitcoin’s Volatility?
Bitcoin’s price swings can be nerve-wracking. Even seasoned investors can get rattled when Bitcoin drops by thousands of dollars within days or even hours. In traditional finance, volatility is synonymous with “risk.” Higher volatility corresponds to higher actual or perceived risk. Volatility usually refers to merely a statistical measure of dispersion of returns, such as standard deviation.
Volatility can be either “bad” (measuring negative returns) or “good” (measuring positive returns). Realized volatility is calculated based on daily log returns multiplied with a factor of square root 365 to yield annualized daily realized volatility over a rolling window of 365 days (Glassnode).
Why Do Investors Like Bitcoin's Volatility?
Bitcoin has historically exhibited high volatility or standard deviation measures, but many are disproportionately skewed to the positive side when examining its returns. This is evident in Bitcoin’s Sharpe ratio of 0.96 from 2020 to early 2024, meaning while the “risk” in terms of standard deviation is higher, investors have been more than compensated for taking that risk (compared to the S&P 500’s Sharpe ratio of 0.65 over the same period).
What Is the Sortino Ratio and What Does It Tell Us About Bitcoin's Volatility?
Even more telling is the Sortino ratio, which only considers downside risk (standard deviation) in its calculation. This gives investors a lens of how much downside risk they accept for the return. Bitcoin’s Sortino ratio of 1.86 is nearly double its Sharpe ratio, revealing much of the volatility was to the upside.
This is not to say that Bitcoin has not experienced significant price drawdowns or high standard deviations to the downside. The key factor is that there have been more instances of the price moving quickly up versus down over time.
Positive Monthly Returns Illustrate Bitcoin's Volatility
A histogram showing Bitcoin’s monthly price returns illustrates this. The positive monthly return mean of 7.8% from 2016 to 2024 (two Bitcoin cycles) is compared to the mean of 1.1% for the S&P 500, which is also more normally distributed.
Will Bitcoin Remain Volatile?
Many factors that drove Bitcoin's volatility in the past will likely become less relevant as time goes on. Countries are progressively adding rules to govern how their citizens can use the currency. As long-term regulations around Bitcoin become clearer, price volatility should decline.
Maturation and Declining Holder Influence
As Bitcoin matures, the market-moving potential of individual holders will likely decline. As the asset grows, it will require a larger amount of fiat currency to put upward pressure on the market price.
Large individual holders can still drastically increase sell pressure, putting downward pressure on the price. However, these large holders won’t be able to do this forever. Either they will hold their Bitcoin and restrict sell pressure or sell it, contributing to a more evenly distributed asset.
Institutional Adoption
Bitcoin interest among institutional investors has also increased. Hedge funds, asset management firms, and endowments are increasingly recognizing Bitcoin's potential as a store of value and as an effective portfolio diversifier, specifically when looking through the lens of an uncorrelated asset that has the potential to hedge against inflation. Approximately $50B worth of Bitcoin is now held by ETFs, countries, and public and private companies.
Supply Dynamics
There will only ever be 21 million Bitcoins in existence. This supply cap was designed intentionally and is one of Bitcoin's primary characteristics. Bitcoin has "halvings" programmed into it. A halving is a 50% block reward cut to the Bitcoin production rate, occurring roughly every four years. This means that the rate at which new Bitcoins are introduced into circulation slows until it reaches zero (estimated around 2140).
These halvings increase the difficulty of mining Bitcoin and will occur until the supply cap is reached. Bitcoin's built-in finite supply means that it is not subject to inflation in the same manner that fiat currencies are. Central banks worldwide have ushered in unprecedented growth in the money supply, eroding their currencies' purchasing value. In comparison, Bitcoin's limited supply and increased mining difficulty over time support the idea of Bitcoin as a long-term store of value and an alternative to gold.
Why Does Low Bitcoin Volatility Precede Large Price Increases?
Bitcoin has behaved predictably. Low volatility often precedes large price movements, and data indicates that Bitcoin price stability can signal an upcoming breakout. Though counterintuitive, periods of low volatility often occur when traders are least confident at the beginning of bull runs. The drop in realized volatility immediately preceding or during a new bull run seems counterintuitive. Ironically, this should be when investors are most excited because it may signal the beginning of a price rise.
Realized volatility tells us this is not the actual sentiment because price swings become somewhat muted. Of course, past performance is no guarantee of future results and these past correlations were merely correlations and not causations. We believe there may be some basic market psychology and patterns that answer this question. The answer may be seller energy.
Low Volatility Signals Seller Exhaustion
Low volatility typically occurs at the end of long bear markets after all the selling has been exhausted and seller energy is low. This historically has been when Bitcoin’s price bottoms out and begins to increase methodically.
During these times, investors are either apathetic towards price, demoralized by the price action, or, in some cases, have sold and left the Bitcoin market altogether. Seller energy helps us examine investor sentiment more closely by taking the percentage of addresses in profit and dividing it by one-year realized volatility.
Analyzing Seller Energy and Its Role in Bitcoin Market Cycles
Note that you use a percentage of addresses, not the total Bitcoin supply because this brings the metric closer to the individual level. This adds an investor lens to volatility that otherwise would not be there.
When doing this, you find that seller energy has historically been above its 95th percentile at the beginning of bull markets. This makes sense because a ratio of addresses in profit and realized volatility should be viewed as interacting positively when the numerator rises, and the denominator falls (rising addresses in profit and falling volatility).
The Relationship Between Low Volatility and Seller Energy
Looking at a chart of seller energy and the number of days below an all-time high appears to strengthen this thesis further. When Bitcoin has gone a long stretch without an all-time high, we see seller energy surpassing the 95th percentile.
It takes unique instances of long bear markets to get seller energy to this point. These rare occurrences have only happened twice in Bitcoin’s history, in 2013 and 2017, before this current instance. Once a new all-time high in price is reached in this environment, we observe a phenomenon we’re calling a green cross, which can be seen as a bullish signal of pent-up energy.
Previous Instances of Buyer Exhaustion and Price Action
This pattern's glaring absence of the 2020-2021 period cannot be understated. Global events like the COVID-19 pandemic can vastly change the trajectory of any market, Bitcoin included.
At the beginning of March 2020, volatility steadily declined, and Bitcoin was seemingly on its path to a price-bottoming phase. In this period, volatility and the percentage of addresses in profit were both low. When the world shut down, Bitcoin’s price dropped rapidly. This led to an immediate spike in realized volatility, breaking the previous pattern.
The Impact of Unforeseen Events on Market Volatility and Price Acceleration
On March 8, 2020, Bitcoin closed at $8,110; by March 12, it was down 40%. The Dow Jones Industrial Average saw similar action on March 6, with a close of 25,864 and an 18% decline by the close on March 12.
This was exacerbated by an influx of new liquidity into the market, resulting in a sharp price rise. Unforeseen events like these can happen anytime and disrupt the entire market. In this case, we saw a jump from price reversal to price acceleration due to the pandemic and saw prices rise rapidly without a typical cooling-down, low-volatility period in between.
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Can Volatility Give Clues to Future Price Movements?
Bitcoin volatility refers to the frequency and intensity of changes in Bitcoin’s price. Bitcoin experiences significant fluctuations in price over time, and these price swings can happen suddenly and without warning.
For example, in May 2021, Bitcoin’s price dipped from nearly $60,000 to about $30,000 in just a few weeks. The sudden and severe 50% decline shocked investors and was preceded by months of volatility that saw the asset rise and fall erratically.
How Bitcoin's High Volatility Creates Profit Opportunities for Savvy Investors
Even traditional investors acknowledge that Bitcoin volatility is much higher than that of stocks and commodities. For instance, in August 2021, Bitcoin's annualized volatility was 91.4%, compared to 16.8% for the S&P 500.
While Bitcoin volatility can scare off newcomers, many seasoned investors view it as a chance to profit. Trading Bitcoin’s price swings can be incredibly lucrative for those who utilize technical analysis and charting indicators to time their buy and sell orders.
How Bitcoin Volatility Affects Price Predictions
Bitcoin volatility can also provide insight into future price movements. A high volatility environment can indicate an upcoming price trend reversal, while low volatility signals a market consolidating before a potential breakout.
As demonstrated above, we believe a classic psychological narrative links the relationship between Bitcoin’s realized volatility and addresses in profit, known as seller energy. A typical Bitcoin cycle sees a long bear market with a low percentage of addresses in profit and high volatility, followed by a subsequent decline in volatility and still a low percentage of addresses in profit or a price bottoming phase.
The Price Appreciation Phase: Low Volatility and Rising Addresses in Profit
As price rises out of the bear market, there is a rise in addresses in profit as seller energy reaches its high. The number of days below an all-time high peaks just as volatility reaches its low. You are calling this the price appreciation phase.
All the while, price and the percentage of addresses in profit steadily rise in a low-volatility environment until a new all-time high is reached. At this point, volatility begins to pick up, and price accelerates as we enter a phase where volatility and the percentage of addresses in profit are both high.
Bitcoin Volatility Indicators
If you’re searching for the best Bitcoin indicators to enhance your trading and investment strategies, consider how they can help you assess market volatility and the current state of Bitcoin’s price action.
Pi Cycle Top Indicator
The Pi Cycle Top Indicator has gained notoriety for accurately predicting several of Bitcoin’s major market tops. Historically, after the indicator flashes a “top signal,” Bitcoin has experienced significant drops, ranging from 52% to 86%.
Here’s How it Works
The Pi Cycle Top Indicator was developed by Philip Swift, an analyst and the founder of LookIntoBitcoin, a digital coin analytics website. The indicator triggers a “top signal” when Bitcoin’s 111-day moving average (orange line) crosses above twice the value of its 350-day moving average (green line). In simple terms, a moving average calculates the average price of Bitcoin over a specific number of days and updates daily.
As of August 2024, both moving average lines in the Pi Cycle Top Indicator are sloping upward. While the orange line approaches the green line, it may still take some time for them to cross. If you’re following this indicator strictly, it suggests that Bitcoin’s cycle isn’t over yet and there could be more room for the bull run to continue.
Note: There were instances when Bitcoin’s price fell significantly even without the moving averages crossing over. When charts start trading above the 350-day moving average, it could suggest that the market is starting to get overheated and entering a euphoric stage.
Stock-to-Flow (S2F) Model
The Stock-to-Flow (S2F) model has gained significant attention for its ability to forecast Bitcoin’s potential future price. Initially designed for precious metals, this model applies just as well to Bitcoin due to its limited supply, which is capped at 21 million coins.
Here’s How It Works
As its name suggests, the S2F model evaluates two key elements of an asset to estimate its future value:
- Stock
- Flow
Stock represents the total existing supply of an asset, while flow measures the new supply generated each year. By comparing these two attributes, the model assesses a commodity’s scarcity, which is crucial in determining its price.
Understanding Bitcoin's Scarcity: The Stock-to-Flow Model
In Bitcoin’s case, the stock refers to the total number of coins in existence, 21 million. The flow is the rate at which new Bitcoin is mined annually.
About 19 million Bitcoins have been mined, representing approximately 90% of the total supply. Each year, Bitcoin’s network produces around 328,500 new coins, as one block is mined every 10 minutes, yielding 6.25 Bitcoins.
Evaluating Bitcoin's Stock-to-Flow Ratio: Scarcity and Its Limitations
We get a stock-to-flow ratio by dividing Bitcoin’s existing supply by its annual production rate. Bitcoin’s S2F ratio is around 57.712, meaning it would take approximately 57 years to mine the total supply. This doesn’t account for Bitcoin’s halvings, events that reduce the block reward by half every four years.
When halvings are considered, the S2F ratio jumps to 124 years, further highlighting Bitcoin’s increasing scarcity. The S2F model doesn’t account for market volatility or unexpected economic shifts. Critics argue that the model relies on questionable assumptions, and as with any single tool, it should be used in conjunction with other indicators.
MVRV Z-Score
The MVRV Z-Score is a valuable metric for determining whether Bitcoin is overvalued or undervalued. By comparing Bitcoin’s market value to its realized value, the MVRV Z-Score provides a clearer perspective on its fair market price.
Here’s How it Works
The MVRV Z-score allows investors to assess how far Bitcoin’s current price deviates from its historical moving average, effectively showing whether Bitcoin’s price is behaving abnormally. This makes it a crucial tool for answering the question, “What is Bitcoin worth?”
How to Calculate the MVRV Z-Score
1. Market Cap: Start by finding Bitcoin’s market capitalization, calculated by multiplying the current price by the total number of coins in circulation.
2. Realised Value: Determine Bitcoin’s realized value. This is the sum of all Bitcoin prices when they last moved. It is tricky to calculate manually, but it is readily available online.
3. Calculate the Difference: Subtract the realized value from the market cap.
4. Divide by Standard Deviation: Divide the result by the standard deviation of Bitcoin’s historical prices to get the MVRV Z-score.
The MVRV Z-score has become an essential tool for Bitcoin investors. It identifies whether Bitcoin is priced fairly, making spotting buying opportunities or potential sell signals easier.
- Overvaluation: If the MVRV Z-score exceeds 6.9, Bitcoin is likely overvalued, often represented as a red or pink “danger zone” on charts. This signals that the market might be overheated, and a price correction could be imminent.
- Undervaluation: Conversely, when the score dips below 0.1, Bitcoin is considered undervalued, often shown as a green “safety zone.” This suggests it could be a good time to buy.
- Momentum Identification: The MVRV Z-score is particularly effective at detecting shifts in market momentum. Historically, when the weekly close has an MVRV Z-score above 5, there is a 94.36% chance of a market reversal. This predictive power makes it a valuable tool for anticipating trend changes.
Short-Term Holder Realised Price (STH RP)
The Short-Term Holder Realised Price (STH RP) is a crucial indicator for traders focusing on short-term market movements. It represents the average price at which Bitcoin was last transacted on-chain within the past 155 days, reflecting the cost basis for recent market participants.
Here’s How it Works
STH RP is calculated by taking the average acquisition price of Bitcoin for investors considered short-term holders. This group is typically defined by coins held for less than 155 days. The idea is that these investors are more sensitive to market movements and tend to buy or sell based on short-term price trends.
Utilizing the Short-Term Holder Realized Price and MVRV Ratio in Bitcoin Analysis
When Bitcoin’s price is below the STH RP, short-term holders are at a loss, which may increase selling pressure. Conversely, prices above the STH RP indicate profit, often creating support levels. The STH RP also helps identify key resistance levels during declines, making it a vital tool for understanding short-term market dynamics. This indicator is especially useful in volatile markets, where the behavior of recent entrants can significantly impact price trends.
The STH RP and MVRV Ratio To dive deeper, the Short-Term Holder MVRV Ratio (STH MVRV) compares the market value of Bitcoin held by short-term investors to its realized value. This ratio helps to visualize unrealized profitability:
- A ratio of 2.0 suggests significant profits for short-term holders.
- A ratio of 1.0 means they are breaking even.
- A ratio of 0.85 indicates a 15% loss, highlighting an increased risk of capitulation.
The Importance of the Short-Term Holder Realized Price in Bull Markets
The STH RP is crucial in identifying potential support levels during bull markets. When Bitcoin’s price returns to this average acquisition price, it often acts as a buying signal for short-term holders, creating a base of support that can help propel the price higher.
The indicator provides insights into the sentiment and behavior of more recent market entrants. Unlike long-term holders, short-term holders are likelier to sell during periods of volatility or price declines, making this metric helpful in identifying potential resistance levels or points of increased selling pressure.
Hash Ribbons Indicator
Timing the market is challenging for any trader, but the Hash Ribbons indicator offers a strategic advantage. This tool, developed by Charles Edwards, focuses on Bitcoin’s hash rate to identify potential market bottoms and bullish trends.
Here’s how It works
The Hash Ribbons indicator uses the 30-day and 60-day Simple Moving Averages (SMAs) of Bitcoin’s hash rate. The hash rate is a key measure of the Bitcoin network’s health, reflecting the computational power used to process transactions. A higher hash rate generally indicates better network stability and security.
The chart below shows a positive correlation between Bitcoin’s price action and the hash rate. When the 30-day SMA crosses above the 60-day SMA, it signals the end of miner capitulation and the beginning of a recovery. A classic example of this pattern is observed around the Bitcoin halving events, where the block reward paid to miners is cut in half.
The Hash Ribbons Indicator: A Reliable Tool for Long-Term Bullish Predictions
The Hash Ribbons indicator has been reliable in predicting long-term bullish trends. For example, between 2016 and 2020, the indicator flashed several buy signals, each followed by a significant price rally. This makes it a favored tool among traders looking to time their market entries during extreme fear and uncertainty. As of August 2024, the Hash Ribbons have printed a buy signal.
Some traders incorporate the 10-day and 20-day SMAs of Bitcoin’s price to filter out false signals for added accuracy. While no indicator is foolproof, the Hash Ribbons has a strong track record and is valuable to any trading strategy.
Bitcoin Analytics Tools
Bitcoin Magazine Pro offers a comprehensive set of analytics tools designed to help investors and enthusiasts better understand Bitcoin through data. The platform provides a wide range of free, regularly updated Bitcoin charts, each accompanied by detailed explanations to make complex information accessible.
For those looking to dive deeper, paid tiers offer features like chart alerts, exclusive indicators, and in-depth market reports.
Informed Decision Making
Whether you're a curious Bitcoin investor wanting to grasp the factors influencing Bitcoin's price or an analyst eager to expand your knowledge, Bitcoin Magazine Pro aims to provide clarity and insights to support more informed decision-making in the Bitcoin space.
Save 30% on Bitcoin Magazine Pro's Bitcoin analysis tool today when you sign up for our annual plan!
Bitcoin Volatility and Overall Portfolio Risk
Investors often shy away from Bitcoin due to its volatility. While it’s true that Bitcoin is a rollercoaster ride compared to traditional assets, its price swings aren’t so different from those of individual stocks. Certain mega-cap tech stocks, such as:
- Nvidia
- Tesla
- Meta
Have exhibited similar or even greater volatility than Bitcoin over the past year.
Bitcoin’s Correlation with Traditional Assets
The more important factor is how Bitcoin’s volatility impacts a portfolio’s overall risk. Bitcoin has a low historical correlation to stocks and bonds, meaning it doesn’t tend to move in sync with these traditional assets. A Bitcoin allocation may impact portfolio volatility less than similar positions in certain individual stocks.
The Diversifying Effects of Bitcoin Volatility
Of course, with large allocations, Bitcoin’s standalone volatility can outsize portfolio risk. But at more modest sizes, Bitcoin’s typically low correlation has tended to provide modest diversifying effects while tapping into a novel source of return.
Prepare for the Ride
Investors must know Bitcoin’s immense volatility and be prepared to weather long and potentially painful drawdowns. That’s why we believe anyone considering investing in Bitcoin should understand their time horizon, risk tolerance, and clear investment objectives.
Navigating Bitcoin Volatility
Investors can also navigate near-term volatility by using standard portfolio management methods such as dollar-cost averaging, regular rebalancing, and maintaining a long-term investment horizon.
Save 30% on Bitcoin Magazine Pro's Bitcoin Analysis Tool With Our Annual Plan
Bitcoin Magazine Pro offers comprehensive analytics tools to help investors and enthusiasts better understand Bitcoin through data. The platform provides a wide range of free, regularly updated Bitcoin charts, each accompanied by detailed explanations to make complex information accessible.
For those looking to go deeper, paid tiers offer features like:
- Chart alerts
- Exclusive indicators
-
In-depth market reports
Whether you're a curious Bitcoin investor wanting to grasp the factors influencing Bitcoin's price or an analyst eager to expand your knowledge, Bitcoin Magazine Pro aims to provide clarity and insights to support more informed decision-making in the Bitcoin space.
Save 30% on Bitcoin Magazine Pro's Bitcoin analysis tool today when you sign up for our annual plan!