Bitcoin volatility is rearing its ugly head once again, disrupting the relatively calm rally crypto enthusiasts have basked in for the past month.
Average daily up-and-down moves in Bitcoin have gotten more pronounced, mimicking trading volatility last seen at the end of 2018 when crypto prices suffered through an extended downward draft. The daily price change for the month of May averages 4.7 per cent, compared with 3.5 per cent in April and 1.1 per cent in March, according to data compiled by Bloomberg. The last time prices swung so wildly was in December, when the changes averaged 4.2 per cent.
The largest digital token dropped as much as 2.4 per cent on Tuesday, falling for the first time in four days, as many investors braced themselves for a new potential bout of turbulence. Tuesday's decline follows a jump of as much as 10 per cent when most US trading was curtailed during the Memorial Day holiday.
Although it's not unusual for the price of cryptocurrencies to fluctuate wildly from day to day, investors had gotten used to a relatively tranquil market, with many digital tokens extending multi-month rallies as enthusiasm built. Greater interest from mainstream companies and a wider embrace by some of Wall Street's largest trading firms, for instance, fuelled much of that fervor, bringing Bitcoin within reach of $US9,000, a level last seen a year ago.
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But, as with many things crypto, most investors grasped for solid explanations for what's led the recent rally, with some chalking it up to exogenous circumstances that could ultimately push prices even higher.
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"The recent surges in Bitcoin are mainly based on the supply side," wrote eToro's Mati Greenspan in a note this week.
"There's already a shortage of Bitcoin in the world and with the halving event coming up next May, the countdown to even less supply has already begun," he said, referring to an event that happens every few years when the number of coins awarded to miners is slashed in half.
The increase in volatility can also be seen in the Bloomberg Galaxy Crypto Index, where the spread between upper and lower price range levels, also known as its trading envelope bands, has widened to the largest for the year. The index doesn't have many support levels in place should a significant move lower occur.
In addition, the Crypto Index tested its upper band in Tuesday's trading session and bounced down, potentially indicating that it's seen a top for the foreseeable future. Bitcoin, which makes up 30 per cent of the index, is nearing its upper band but has yet to test it.
For Bloomberg Intelligence analyst Mike McGlone, it's meant looking at 30-day volatility levels, which are near the December peak that marked the bear market bottom. The opposite could be happening now, he said.
"When volatility gets high it should be indicative of extremes in price," he said in a phone interview.
"The market is getting a bit stretched here from a trader's standpoint."
Bloomberg