Crypto Volatility Updates
“The entrance strategy is actually more important than the exit strategy”
With BTC struggling to gain solid ground above the $40,000 range & ETH trailing against the broader DeFi ecosystem, it appears that there are lots of mixed opinions on where we are today in the crypto markets. Last week, the CVI — which measures the crypto markets’ sentiment on future volatility, reached its lowest value (65) of the past 14 months. The last time we saw this range of values was in October 2020.
There is no doubt that the correlation between the crypto markets and global technology stocks has only increased in the past few weeks. Also, given U.S. President Joe Biden’s inflation concerns — which were highlighted a lot in his most recent press conference — it appears that the Federal Reserve’s monetary tightening will most likely occur sometime in 2022. Against this backdrop, it will be important to monitor the 2–3 month performance of CVI; if option traders believe the fight on inflation will lead to significant monetary tightening, observing their actions on the options market (which is highly correlated with CVI), will give investors a glimpse of the crypto market’s trajectory in 2022.
It’s been an unexpected start of the year, and it’s common for investors to have a list of concerns regarding the markets; inflation, geopolitical issues, omicron,….regulation, just to name a few. Taking a traditional approach to value investing, this period offers a unique opportunity for investors to filter through the noise and highlight assets they believe have long-term utility benefits in the digital ecosystem.
This week’s takeaways:
- The crypto volatility index reached its lowest point (65) in 14 months.
- There was limited week-over-week risk run-up; the highest point on the CVI for the past week was 73.
- Observing the 1-month trend on the CVI, it is clear that sentiment on volatility has been on a decline since mid-December 2021.
Is $40,000 the floor for BTC?
That is the main question on the minds of investors as they continue to brace for more price action (HODL?). At the start of the week, Bitcoin opened around the $42,000 range and is still hovering around this value at the time of writing this (Thursday, January 20th). It does appear some of the geopolitical issues in Kazakhstan and Ukraine, while still playing out, have not caused widespread panic among investors.
Looking through the 3-month BTC chart, it is clear there have been lots of corrections from the early November peak; how deep this correction goes is the ultimate question.
Ethereum, on the other hand, has lagged most of the altcoins on a month and 1-year basis. While its market correction has not been as drastic as Bitcoin’s, it has hovered below $4,000 since late December.
It was a much calmer week on the CVI. After maintaining the 75-range floor, there was a breakout from this value on January 12th, 2022, and this continued for a few days before reaching the 14-month low-point of 65.
It was almost a similar story for the ETHVI, which measures Ethereum’s implied volatility. While not reaching a 14-month low (like the CVI), there was a considerable drop in its value over the past week.
Overall, we look forward to seeing the upcoming price and market actions as we approach the end of January 2022. The Lunar New Year is also fast approaching, so maybe we will see reduced volume as our colleagues take time off to celebrate (in their houses).