Bitcoin breaks away from gold, extends bearish streak

Bitcoin’s struggles continue as it breaks away from gold, seemingly getting even deeper into the bearish streak that started in late August. 

The CryptoQuant Bull-Bear Market Cycle Indicator, which tracks market trends, has been in the bear phase since August 27, when Bitcoin was trading at around $62,000.

Since then, BTC price has dropped more than 15%, hitting a low of under $53,000 at some point. Clearly, the market isn’t expecting a rally soon, with the potential for further consolidation more likely.

Adding to the trouble, the MVRV ratio has been flashing warning signals. Since August 26, it has stayed below its 365-day moving average. A similar trend in May 2021 saw Bitcoin’s value drop by 36% in two months.

The last time we saw this was November 2021, at the start of Bitcoin’s previous bear market.

Long-term holders show weakness

The Long-Term Holder (LTH) SOPR ribbons , which measure profit margins on spent outputs, have been sliding downward since late July.

This is a strong indicator that demand for Bitcoin is drying up, as these holders are now cashing out at lower profits.

But while BTC sinks, gold is on the rise, recently reaching new record highs. This has turned the usual correlation between the two assets negative.

And the weakening US dollar isn’t helping matters. Typically, when the dollar weakens, Bitcoin should surge a bit, but that’s not the case right now.

This could mean there is a broader market stress, as global uncertainty makes investors ditch both Bitcoin and the dollar. As I write this, Russia is at a United Nations meeting blatantly talking about World War III being near.

That would make things so much worse for crypto markets.

Bitcoin follows US stocks

Bitcoin’s troubles also seem to mirror the market decline in America. The Nasdaq 100 Composite Index has fallen by 10% since July 9. In that same period, BTC has taken a 16% hit.

Not only that, the correlation between BTC and the Nasdaq has flipped from negative to positive, now sitting at 0.39. 

This means that Bitcoin, which used to move somewhat independently of the stock market, is now more in sync with its declines. That is terrible, considering the upcoming Federal Reserve rate cut is expected to be bad for stocks.

Volatility has always been part of Bitcoin’s identity, but recent trends show that it is actually less volatile than some big-name stocks. From 2020 to 2024, BTC was three to four times more volatile than most equity indices.

Still, over the last two years, realized volatility was lower than Netflix’s, with BTC averaging 46% compared to Netflix’s 53% on a 90-day timeframe. 

So, regardless of everything, Bitcoin is not the outlier it used to be when compared to the stock market’s “Magnificent Seven” group of high performers.

What is behind Bitcoin’s declining volatility??

In fact, compared to the entire S&P 500, Bitcoin’s annualized volatility was lower than 33 of the 500 companies in the index as of October 2023.

One reason for this decline in volatility could be Bitcoin’s increasing market maturity. As the market cap grows, the effects of new capital flowing in becomes less dramatic.

This shows up in the long-term volatility chart, where BTC’s volatility has followed a downward regression line. Interestingly, the crypto queen seems to be copying gold’s early days.

When the dollar was de-pegged from gold and private ownership was allowed again, gold prices skyrocketed, hitting a volatility spike of over 80%, almost double BTC’s volatility in April.

As gold became more established as an asset class, its volatility dropped. Bitcoin seems to be doing the exact same thing.

Traders overestimate the volatility

Traders tend to overestimate Bitcoin’s volatility when pricing derivatives. Implied volatility (how traders expect volatility to play out) has consistently been higher than realized volatility.

In simpler terms, traders have been expecting bigger price swings than what actually happens. This has been a common theme in Bitcoin’s history, with implied volatility often overshooting the mark.

Still, the rest of 2024 could see an uptick in volatility. Implied volatility is hinting at a sharp increase, and it will be worth watching to see how this compares with realized volatility as the year rounds up.

Actually, this volatility isn’t always a bad thing. It has been more skewed toward positive returns. From 2020 to early 2024, Bitcoin posted a Sharpe ratio of 0.96, meaning investors were well compensated for taking on the risk. 

In comparison, the S&P 500 had a Sharpe ratio of 0.65. Bitcoin’s Sortino ratio, which focuses only on downside risk, was nearly double its Sharpe ratio at 1.86. 

That’s why we’ve seen BTC’s monthly returns averaging a positive 7.8% from 2016 to 2024, compared to the S&P 500’s 1.1% over the same period.

Despite lower volatility, capital kept flowing into Bitcoin, leading to a price increase of 150% throughout 2023.

February 2024 saw it break above $60,000 with much lower volatility than in previous years. Back in 2021, it was nearly twice as volatile when trading at $60,000.

While past performance doesn’t guarantee future results, Bitcoin’s history shows that low volatility often leads to price increases. 

The trigger could be what’s called “seller energy,” a concept that looks at the percentage of Bitcoin addresses in profit divided by volatility.

The current market environment is unique. Keep that in mind.