Key Takeaways

• Bitcoin has been tightly range-bound for last month, its 10% fall this week its biggest move since the banking crisis
• Dan Ashmore, our Head of Research, warns that volatility will return before long
• Over 50% of stablecoins have left exchanges and orderbooks are thin, he writes, meaning there is less needed to move the price
• T-bills paying 5% have pulled capital from the space, leaving Bitcoin more open to big price moves
• Direction will depend on interest rate policy, with economy at crucial juncture

Bitcoin has pulled back over the last week, the orange coin dipping 10% from just north of $30,000 to $27,200. But the remarkable thing about this price move is how unremarkable it is. 

Bitcoin has been extremely tightly bound since the banking crisis subsided over the last month, its daily moves notably gentle compared to its usual extreme volatility. This relatively benign 10% move – Bitcoin has printed a 10% candle in seconds before – amounts to the largest move since the banking crisis subsided and Bitcoin propelled upwards as interest rate forecasts softened. 

In fact, when you plot the average of the last 30 days of price moves, this past month is now close to flat, but history shows that it has never stayed around that placid level for long. 

We can be particularly certain that volatility will return this time around. That is because one of the key factors in heightened volatility is as prominent as ever in the Bitcoin markets: a lack of liquidity. 

With less liquidity, there is less money needed to move prices. And right now, liquidity is as thin as it has been in quite a while. 

Since the exit of Alameda in the aftermath of the disastrous FTX collapse, order books have been shallow. Looking at stablecoin balances on exchanges is another indicator of this. I put together a deep dive recently analysing the extraordinary outflow of stablecoins from exchanges: 45% of the total balance has fled exchanges in the last four months. The updated figure is over 50% of stablecoins gone since December. 

In a world where interest rates have ballooned at the fastest rate in recent memory, while yields in the crypto space fall, perhaps this is not surprising. T-bills are now paying over 5%, while crypto investors have seen countless blowups in the space – Celsius, Terra and FTX – while sentiment has collapsed and fear flooded the market. 

When there is a US government-guaranteed investment paying 5.1%, why would anyone hold a stablecoin with the risks that flooded the market over the last year?

And so, while Bitcoin has been trotting a relatively peaceful path over the past month, the party on the charts will return before long. With thin liquidity comes heightened volatility, meaning if there is a trigger in the market, Bitcoin’s price could very likely move further than what it otherwise would. 

In fact, looking at the volatility metrics, while it has dipped in the last two weeks, realised volatility was the highest since June 2022 earlier this month. So while the price moves have been cancelling each other out as Bitcoin oscillates within a tight window, counter-intuitively, the volatility is still high. 

The trillion-dollar question, of course, is which direction will it go.

I’m not smart enough to predict that with any degree of confidence in the short term, but whichever way it moves, it will depend on macro conditions. Bitcoin continues to hold the stock market’s hand, its correlation with the tech-heavy Nasdaq especially high. 

With financial markets still so dependent on interest rates, the word of Jerome Powell and the Federal Reserve will remain key. Backing out probabilities from Fed futures, the market seems to be betting that the Fed has perhaps one more hike in it before shutting up show on this period of tight monetary policy. 

As we saw last month with the banking crisis, this plan could change quickly. It really is a macro climate of unprecedented nature, this mix of high inflation and generationally quick rate hikes, even if coming from such a low base. 

Risk assets will have their day again, it’s just a question of when. In the short term, it is hard to say, but whichever way the sentiment goes, don’t expect Bitcoin to remain asleep for very long.