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Bitcoin’s wild price swings spell trouble for traders and exchanges, opening the door to its ethereal rival as it prepares to up its game by moving to a leaner, leaner blockchain.
Bitcoin is called many things. Buzzy, glamorous, confusing, even fake. But never boring. Still, he’s been eerily subdued lately.
The king of swingers uncharacteristically hovered around $20,000 for several days and hasn’t gotten far past that since June.
That spells trouble for traders and exchanges that profit from bitcoin’s wild price swings, and opens the door for its rival, ether, which is preparing to up its crypto game by moving to a meaner, leaner blockchain.
“Bitcoin is not dead, it’s just boring right now, so traders are already looking for alternatives,” said Martin Leinweber, digital asset product strategist at MarketVector.
Bitcoin’s average 30-day volatility — a measure of how its price changes over a period of time — fell to 2.7% from more than 4% in early July, according to data firm Coinglass.
That number remained firmly below 5% in 2022, even in the most turbulent months of the depressed price “cryptozyme” – a departure from the past five years, when even periods of lower volatility were followed by jumps of up to 7%.
Similarly, CryptoCompare’s index, which uses bitcoin futures contracts to gauge how far prices are expected to move, is just above 77, down from more than 90 at the start of the year.
Bitcoin has experienced periods of reduced volatility in the past, often during periods of depressed or falling prices, with its price swings often returning as trading activity picks up.
But this slump can be different.
“It’s been a relatively long period of reduced volatility, now it’s beyond anything we’ve seen in 2019, when these levels lasted for about a quarter to a quarter and a half,” said Stéphane Ouellette, CEO of the crypto derivatives provider. FRNT Financial.
Leinweber at MarketVector pointed to the uptick in trading of ether and its derivatives as a side effect of bitcoin’s subdued volatility.
The price of ether — the No. 2 cryptocurrency with a market cap of roughly $190 billion, compared to bitcoin’s $380 billion — has risen 50% since the start of July, while bitcoin has stagnated.
Ether doesn’t offer much price drama; is much less volatile, peaking at just over 2% in March 2020 during the worst of the COVID market, according to data firm Messari.
Still, it’s soaking up a lot of crypto buzz at the moment as it teeters on the brink of its “merger,” which should finally happen later this month, when it undergoes a radical shift to a much less energy-intensive system where new ether tokens are created.
Burned by cryptocurrencies
For longer-term investors in traditional assets such as stocks or bonds, narrower price swings can appear to be a positive. But for many investors and the main wheels of the Bitcoin and crypto economy, this is not the case. For example, exchanges make money by charging fees for trades; when volatility decreases, trading activity tends to evaporate.
For crypto hedge funds that tend to trade on price swings, more stable values also offer diminishing chances of profit.
So what is behind the drop in bitcoin volatility?
First, the flight of investors from the broader crypto space, meaning fewer people are willing to trade their coins.
Cryptocurrencies have had a busy year, with investors dumping risky assets across the board in the face of rising inflation, with bitcoin down 60% and ether down 55%. Confidence in the sector has also been dented by major breakouts in two major coins and the bankruptcy of a major lender.
The dollar value of bitcoin trading volumes on major exchanges fluctuated between $127 million and $142 million over a 7-day period, according to data from Blockchain.com, the lowest level since October 2020. Similarly, bitcoin futures trading is at its lowest level since November 2020, data from the block showed.
“The highest levels of volatility usually coincide with the highest levels of interest in cryptocurrencies,” Ouellette said. “People get burned and say ‘I’m not really interested in cryptocurrencies now’.”