Quiet and Trending
Bitcoin and volatility go hand-in-hand, and critics often leave out that it's historically volatile to the upside. What if we could also characterise this volatility and map out Bitcoin market cycles?
Bitcoin is famous for its volatility, being a point of focus for critics of the asset throughout its history. The claim is that Bitcoin is nothing more than a speculative casino chip, and the elevated volatility makes it unusable as a currency, or a store of value.
I love when data and a good chart can debunk claims like this with little effort, and this one by Alex Thorn, nailed it. The chart shows how Bitcoins 30-day volatility (orange) is well within the range of the top performing US stocks, which is a good reminder that volatility to the upside is a good thing.
Its also worth highlighting that a key reason the SPY index (black) has a lower realised volatility is that the out sized performance of the Magnificent-7, is being offset and weighed down by the shocking performance of the Not-so-Magnificent-493.
In today’s post, I want to explore Bitcoin’s volatility profile, and present a framework I use to contextualise various Bitcoin market regimes.
The end goal is to characterise whether the current market conditions resemble a stable bull market uptrend, or if we are transitioning into something more unstable and volatile during this consolidation.
Disclaimer: This article is general in nature, and is for informational, and entertainment purposes only, and it shall not be relied upon for any investment or financial decisions.
Volatility Is Compressing
Markets are dynamic and non stationary. This means that over time, and with changes in the environment, the characteristics of how an asset trades will evolve. For Bitcoin, it has historically traded more like a commodity, with a few notable characteristics:
Bull Markets run hard and fast, which I have often likened to a period where Bitcoin is ‘re-priced’ higher, never to return to levels from the previous bear.
Volatility is elevated during uptrends, as momentum and price discovery bring in increasing numbers of speculators for ‘Numba-go-up’.
Bear markets are long, slow and drawn out, representing an oversaturation of supply, and a fairly rapid tarnishing of the moon math that got us here.
Volatility declines in during downtrends. This is almost the exact opposite to what stock traders are used to, where the VIX spikes during downdrafts, and compresses when markets start moving higher.
The chart below shows how realised volatility for Bitcoin typically trends higher during bull markets, and lower during bear markets.
The peak level of realised volatility at the height of the euphoria is also measurably falling over time. In 2024, volatility has been between 40% and 60%, which is half what it was during the 2017 and 2021 bull runs. Granted, I personally believe we still have gas in the tank for this macro uptrend, so we will have to compare how things look closer to the end of the bull for a true apples-to-apples comparison.
Empirically speaking, Bitcoin’s volatility is decreasing over time, despite all the narratives and complaints by critics to the contrary.
In my time studying this asset, I have also noticed there are two general categories, or phases of a Bitcoin bull market:
The Enthusiastic Bull - which is slower, quieter, and typically defines the period between the cycle low, and breaking to new ATHs.
The Euphoric Bull - which runs harder, faster, and is considerably more volatile. This phase usually kicks off as the market approaches and breaks to new ATHs.
The chart below compares the short-term 1-week volatility to the longer-term 1-year volatility. Notice how the short-term volatility tends to be higher than the more stable long-term baseline during the Euphoria phases of a bull market?
We are starting to build a picture of how Bitcoins volatility trades over time, which can help us contextualise where we are in the current market cycle.
A Volatility Framework
Frameworks help us think about complex topics, and avoid getting too bogged down in nitty-gritty details at every turn. A good framework is one which allows us to simplify the world, but also remain sufficiently flexible such that we don’t have an unmanageable number of edge cases.
When it comes to characterising the Bitcoin market, I have used the framework below for years. This is a piece of wisdom I learned it from my good friend, and market mentor, Doc Severson.
It splits the market into four quadrants based on the trend direction and volatility regime. We can equally apply this across a macro (multi-month) and a micro (intraday to daily) timeframe.
I have colour coded the last nine years of Bitcoin history in the chart below based on my analysis, gut instinct, and lived experience. The zones are not intended to be perfect, but more-so to give an idea for how I would generally apply this framework at a macro scale.
There are a few key pointers for how to think about this concept:
🟢 Enthusiastic Bulls are usually Quiet and Trending markets. They are characterised by stair-stepping rallies, into consolidation, into another rally.
🔴 Euphoric Bulls and Early Bears are usually Volatile and Trending markets. This reflects the irrational speculation and exuberance on the way up, and the time it takes for that sheen to wear off on the way back down.
🟠 Bear Markets tend to be primarily Volatile and Sideways markets. If you closed your eyes for 12-months, the market has gone nowhere, but has taken a long time (and a lot of casualties) to get there.
🔵 Late Bears are some of the few times Bitcoin is Quiet and Sideways. The market is exhausted after a 75% decline, and it takes time for the HODLers to establish a robust floor.
If we zoom in, we can apply this framework to Bitcoin’s price structure since the 2022 bear market. We can see how the angry and volatile downtrend of 2022 🔴 eventually exhausts the market 🔵, resulting in several months of quiet and sideways price action.
In my opinion, the 2023-24 market has been remarkably structured, and orderly. It appears to be going through a series of progressive rallies, sideways consolidations, and then back into a rally. Meanwhile, the drawdown profile is impressively shallow, having given back just -20.4% since the cycle high.
This is what I would classify as a quiet and trending market at a macro scale, which is characterised by an internal micro structure of:
🟢 Quiet and Trending —> 🟠 Volatile and Sideways —> 🟢 Quiet and Trending
Overall, the Bitcoin uptrend in 2023-24 looks fairly structured, following stair-stepping rally-consolidation-rally pattern. However, as the charts above show, volatility tends to pick up during a consolidation, and that can lead to instability.
Paid subscribers can read onto Part 2 where I will cover my assessment of our current market structure (written and video), and the key metrics I have my eye on for tracking when instability starts to develop.
📽️ Watch Part 1 of the Video Analysis for free here