Volatility analysis shows: The real Bitcoin bull run has not even started yet

Bitcoin has grown strongly in the last six weeks: According to market data, the leading crypto-currency gained 70 percent. This makes it the world’s most powerful macro asset class.

Some interpret this rapid appreciation as a signal that BTC will soon correct. But according to a fund manager’s volatility analysis, the truly volatile part of this rally has not even begun.

Bitcoin’s volatility is not nearly as high as in 2017
Bitcoin has become essentially parabolic in the last two months. But as you can see, this rally has not been interrupted by the strong rallies and declines of previous bull markets.

Bitazu Capital’s founding partner, Mohit Sorout, recently shared a chart showing that Bitcoin’s historical volatility index is currently close to multi-year lows – even though the coin has risen 70 per cent in six weeks.

Chart showing the price development of BTC over the last six weeks. Source: BTCUSD from TradingView
Assuming that volatility will eventually return to the levels of previous market cycles, it is fair to say that the true exponential part of this rally has not yet begun.

Will volatility remain low?
Trader „Z“ writes in an article for FTX that the low volatility may be permanent – due to movements in the crypto currency derivatives market.

He writes that firstly, there has been a large outflow of BTC from the exchanges, while only a few BTC are sent to the exchanges from private accounts, which reduces the selling pressure that could characterise strong downward trends in bull markets.

Z added that the introduction of high frequency traders and other prop trading desks had led to a dampened volatility:

„BitMEX also saw a flood of prop trading desks entering the room, trying to maximise spread trading and market making on inefficient order books. In the past, it was common for funding rates for perpetual swaps to exceed 5 basis points per 8-hour period and today they rarely exceed the 1 basis point baseline. Market makers had taken control of the market and let the spreads slip into oblivion, further dampening volatility“.

Not to mention that the loss of BitMEX market dominance has changed how many traders actually work in the room.

BitMEX operates on a BTC margin model, which means you need BTC to open contracts for long bitcoin. Other exchanges, such as ByBit, usually use a USDT margin model.

The way BitMEX products are structured dramatically increases volatility during downtrends, as you need to provide more collateral than USDT contracts. This creates incentives for recursive price actions in downtrends, as we saw in March.

As other exchanges take over a large part of BitMEX’s market share, this could also be the reason for the low volatility.