Over the past couple of weeks, Bitcoin has been stuck trading within a fairly tight channel but is showing signs of correlation with traditional markets. Some say that Bitcoin correlation with equity markets may be short lived, however.
Bitcoin is trading above the $9230 mark for the first time in over a week. Is it time for the world’s largest cryptocurrency to break out of the price channel that it’s been stuck inside of for the past 10 days? Some say that future price action for Bitcoin will be dictated by global stock market performance while others say that the consolidation period will come to an end at BTC’s own accord. Only the next few days will tell but there are some indicators suggesting both realities worth looking at.
In the case of Bitcoin’s correlation with the broader stock markets, the latest increase in price came at nearly the same time as a stronger than expected close for virtually all equity markets. With stock markets the world over clocking in all-time highs as a result of increased governmental bailouts and assistance, it would appear that Bitcoin is along for the ride. Traditionally (at least in the scope of Bitcoin’s age) BTC far outperforms stocks on a yearly basis, but in June the table have turned. Major exchanges are up from around 2-4% while Bitcoin is currently down by nearly 9% at the time of press.
The reasons for the price differences between equity markets and those for cryptocurrencies likely stems from crypto’s lack of governmental assistance, but the moves seen recently still suggest that a directional correlation still exists, …until it doesn’t. Crypto markets are known for finding their own paths and Bitcoin is no exception. That said, with increased institutional involvement and more traditional, derivative-based investment tools now tied to Bitcoin, more mainstream approaches do influence Bitcoin markets that cannot be ignored.
One example of how Bitcoin price action can now be predicted in ways that were at one time unavailable can be seen in the derivatives space. As investors can now purchase and sell option contracts tied to Bitcoin, the pricing of those contracts reveals much in the way of a general market expectation for upcoming Bitcoin pricing. One factor that goes into how options contracts are priced is volatility. The simplest of options contracts are directionally biased which means investors place highly leveraged bets on which direction the prices will move. When prices are known to be volatile, the chances of being right about the direction are increased which means more volatility equals less risk, and that leads to more expensive contracts. Bitcoin volatility is now at levels far below anything we have seen in a long time, but the volatility rated has begun to pick up over the past few days.
What does an increase in volatility mean for a price prediction? It could signal the near end to Bitcoin’s current consolidation phase which could also mean explosive price action in either direction may very well be on the horizon. Derivatives markets for Bitcoin have seen an uptick in options contract activity over the past couple of days thanks to the favorable rates caused by decreased volatility. Many see the activity as a sign that big investors (the smart money?) are gearing up for a significant price move. The fact that increased buying volume is showing up on crypto exchanges when Bitcoin prices fall below 9K only furthers that thesis that investors are buying the dips in expectation of a price move.