Cryptocurrencies have become one of the most traded asset classes among young investors/traders. The excessively high volatility of the entire crypto space makes it an attractive asset for investors with a very high-risk appetite.
Bitcoin has recently been making headlines as it dropped from the all-time high of around US$69,000 to the recent low of ~US$25,400, earlier this month, eroding around 63% of its value. Although we have seen a bit of buying from the lower levels, Bitcoin was having difficulty giving a meaningful recovery and had been trading in a very tight range since then.
There has been an interesting price action going on that might knock bears out of the ring. As can be seen from the chart below, Bitcoin had been trading in a directionless trend and only testing the patience of investors. In the due course of consolidation, the stock was slightly trending downwards, which translated into a falling trendline resistance being created on the charts.
Today, the stock surged past its falling trendline resistance, which is the first sign of a potential up move after it crashed earlier this month. Also, strong demand for Bitcoin has led to a price gain of over 4% to US$30,661 (as of 2:55 PM IST), which makes the breakout even stronger. Although a 4% move isn’t much for any coin in this space, the timing of this gain (at the breakout level) gives it more weightage.
Apart from the price breakout, Bitcoin is also looking to switch back to a high volatility regime which could be interesting. As mentioned earlier, it had been trading in a very tight range which also reflected the suppressed volatility. Volatility is mean-reverting in nature, i.e. it generally does not trend but moves from high volatility to low volatility and vice versa.
After a period of low volatility, the regime might be changing soon. This can simply be understood by the Bollinger Bands® (bands) which depict volatility. During the fall, the bands were stretched out far from each other, showing a high volatility regime and started squeezing as Bitcoin entered a tight range.
Today, the bands are quite narrow and going back to its mean-reverting property, volatility might spike which would again expand these bands. Technically, a security closing above the upper band gives a volatility breakout signal and this is what traders might be watching next.