Cryptocurrency markets’ low volatility: A curse or an opportunity?

Cryptocurrency markets are well-known for their volatility, wherever ample terms swings assistance investors make oregon suffer fortunes. Yet determination are often periods of comparative stableness wherever the choky terms enactment bores immoderate portion being an accidental for others.

Since the opening of the year, Bitcoin’s (BTC) terms has soared by implicit 60%, climbing from astir $18,000 to implicit $27,000 astatine publishing time. However, the cryptocurrency has been stuck successful a constrictive scope for the past 2 months, fluctuating betwixt $26,000 and $29,000. It has occasionally attempted to interruption retired supra $30,000 but besides faced immoderate dips to $25,500.

According to CCData, Bitcoin’s volatility has dropped to 48.2% this twelvemonth from 62.8% past twelvemonth and from 79% successful 2021. The cryptocurrency’s mean regular alteration truthful acold this twelvemonth has been steady, with gains of 1.68% and losses of 1.93%.

— CCData (@CCData_io) May 23, 2023

Investors person a fig of options astatine their disposal to make much during periods of debased volatility, including simply lending their tokens retired via decentralized concern (DeFi) protocols oregon done centralized exchanges. Other alternatives see staking and precocious strategies utilizing derivatives similar options and futures.

Given the highly volatile quality of the cryptocurrency sector, this choky inclination is interesting. Similarly unchangeable periods successful the past person been followed by important terms movements, either to the upside oregon the downside, but stableness doesn’t mean determination aren’t strategies that tin assistance boost investors’ returns.

Crypto traders are expecting debased volatility

While the astir often-used strategy during these periods is to conscionable hodl tokens portion waiting for greenish candles, determination are galore strategies that tin beryllium utilized during sideways markets, including immoderate market-neutral approaches that let investors to instrumentality vantage of these periods, particularly if they fishy erstwhile they mightiness end.

Speaking to Cointelegraph, David Duong, caput of organization probe astatine Coinbase, noted that the choky terms enactment successful the cryptocurrency abstraction was partially driven by a crisp United States dollar retracement, with galore traders sitting connected the sidelines “waiting for a wide inclination to emerge.”

Duong added that “many integer assets are inactive trading wrong well-defined ranges,” stating:

“If we look astatine the options space, we person seen implied volatility soften to immoderate of the weakest levels successful caller memory. For example, the 1M ATM 30D [one-month at-the-money 30-day] implied volatility for some Bitcoin and Ether are present adjacent 41% arsenic of May 30, astir 10 measurement points little than they were 1 period ago.”

The Coinbase executive’s connection points to debased marketplace expectations of important terms swings for some Bitcoin and Ether (ETH). Duong reiterated Coinbase’s stance that it’s “constructive connected Bitcoin and the wider crypto marketplace implicit the adjacent six to 12 months, based connected our Fed and macro views.”

Ahmed Ismail, CEO and laminitis of crypto liquidity aggregator Fluid, told Cointelegraph that during these periods, scope trading is simply a “particularly charismatic strategy” that aims to “take vantage of terms oscillations, and choky terms enactment tin supply much precise introduction and exit points for scope traders.”

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Ismail added that level terms enactment tends to “recede periods of utmost terms moves triggered by large events” and noted traders are eyeing aggregate imaginable catalysts, which see the imaginable illness of determination U.S. banks and the Federal Reserve’s upcoming determination connected short-term involvement rates.

Becky Sarwate, caput of communications and marque astatine cryptocurrency speech CEX.io, pointed retired that periods of “stablecoin-like enactment tin invitation a reflective play for traders to reevaluate their attack oregon see alternate pathways done the ecosystem.”

Sarwate added that Bitcoin has likewise consolidated and saw its volatility driblet successful January 2023 earlier breaking out, though she warned traders “should ever beryllium cautious to pursuit the representation of humanities events,” concluding:

“While it tin beryllium tempting to look for acquainted patterns, it’s important to retrieve that marketplace conditions are ever successful flux and tin not beryllium relied upon to replicate.”

Konstantin Horejsi, main merchandise serviceman astatine cryptocurrency speech Blocktrade, said that specified choky terms enactment affects short-term trading activity, but told Cointelegraph that those who “believe successful the semipermanent worth proposition of integer assets” are inactive holding onto them oregon adding via dollar-cost averaging strategies.

While traders expecting little volatility whitethorn person an interaction connected trading volumes, it doesn’t needfully mean things aren’t happening arsenic determination are galore strategies that tin beryllium utilized during these periods.

Managing hazard during sideways markets

When asked what strategies tin beryllium utilized to negociate hazard during periods successful which the marketplace keeps moving sideways, CEX.io’s Sarwate said that terms consolidations and carnivore markets “can go timely moments to revisit and perchance rebalance one’s crypto portfolio.”

To Sarwate, these periods of comparative stableness tin “provide the breathing country indispensable to marque tactical decisions.” Traditional and liquid staking opportunities CEX.io’s marketplace probe squad has been tracking, she added, person led to accrued web information that’s “measurable crossed a breadth of wallet denominations” arsenic staking services tin “offer intuitive on-ramps for participants looking to research the integer economy.”

Tools similar halt orders whitethorn suffer their effectiveness during these periods, Sarwate said, portion liquidity shortages “can hazard leaving immoderate actions unfulfilled.” As such, it’s important to person a steadfast grasp connected absorption and enactment levels, she stated.

Ismail said that it’s important to calibrate hazard by “determining what information of your portfolio you privation to allocate to crypto for the agelong term” and suggested the champion strategy was to conscionable support accumulating:

“The champion strategy for an mean crypto capitalist is to dollar-cost average, oregon DCA, implicit time. Instead of trying to clip the marketplace by predicting the terms moves, physique up a coagulated presumption successful your preferred crypto by regularly investing a fixed sum careless of existent marketplace conditions.”

Increasing currency allocations, helium said, could besides beryllium viable. More blase traders tin nevertheless find opportunities successful options adjacent erstwhile prices are stagnant, Ismail added, noting that “only a tiny percent of options traders marque money.”

Managing hazard is “an ongoing process” truthful investors should “regularly measure and adjust” their hazard absorption strategies portion reviewing their portfolios arsenic marketplace conditions change.

Speaking to Cointelegraph, a spokesperson for starring stablecoin issuer Tether said that during periods of choky terms action, hazard absorption tin “involve diversification crossed antithetic assets, employing stop-loss orders and monitoring marketplace indicators for imaginable shifts.”

Managing hazard is intelligibly a precedence erstwhile markets springiness investors immoderate clip to breathe, but arsenic the particulate settles, it whitethorn beryllium hard to archer if and erstwhile things are going to go much volatile again.

Potential breakout indicators

The Tether spokesperson said that investors should look for indicators specified arsenic “increased trading volume, volatility enlargement oregon important quality oregon events that whitethorn precede a breakout from choky terms enactment not lone successful the crypto marketplace but besides successful the accepted fiscal markets.”

Ismail corroborated that measurement is thing to support an oculus on, arsenic “increasing trading measurement suggests marketplace participants are becoming much active, which tends to travel terms movements.” Technical investigation specified arsenic illustration patterns, helium added, could besides supply clues connected a imaginable breakout.

Looking astatine imaginable signs of a breakout, Sarwate dug deeper, pointing retired that on-chain anomalies tin often pull attraction during these periods. Outsized spikes successful cardinal variables oregon heightened enactment could “read arsenic gesturing towards a pending action,” she said, adding:

“Traders volition often person a unsocial operation of metrics, oregon a circumstantial inclination they show that signals to them erstwhile something’s moving successful the water. However, immoderate specified hunches should beryllium rigorously investigated and ideally cross-referenced arsenic overmuch arsenic imaginable to guarantee their validity earlier committing to a people of action.”

While traders trust connected these metrics to assistance them effort to clip the marketplace — thing galore person warned against — they whitethorn besides usage the clip they person to hold to capitalize connected their holdings.

Using market-neutral strategies

Market neutral strategies, oregon those that purpose to make returns portion minimizing vulnerability to wide marketplace movements successful a bid to trim the interaction of volatility, tin beryllium considered during these periods, according to Tether.

These strategies tin beryllium arsenic elemental arsenic staying connected the sidelines holding onto stablecoins and generating gross by lending them, oregon they tin beryllium alternatively complex. More precocious strategies involve, for example, selling covered calls, which according to Fluid’s Ismail tin beryllium “really beneficial during periods of choky terms action.”

Alexia Theodorou, pb merchandise manager astatine Kraken Futures, told Cointelegraph that crypto derivatives tin beryllium utilized to “navigate some carnivore and sideways markets,” with short-selling allowing investors to usage falling prices to their advantage, perchance besides creating hedging strategies for their positions.

Theodorou said that if a trader, for example, holds BTC, they tin usage it arsenic collateral connected a abbreviated futures position. This abbreviated presumption volition summation if the terms of the underlying BTC terms drops, efficaciously protecting the trader from the falling price. Theodorou added:

“Similarly, traders tin make positions consisting of a operation of agelong and abbreviated contracts successful assets with akin rates of instrumentality — a correlation coefficient — to mitigate vulnerability to marketplace fluctuations and periods of precocious volatility. Called a marketplace neutral strategy, the purpose is to make returns careless of wide marketplace direction.”

Crypto derivatives, she said, are yet a instrumentality that encourages amended terms find and helps “lead to much businesslike and liquid marketplaces.” 

Options strategies tin connection investors akin market-neutral strategies. Covered telephone options, for example, spot the proprietor of an underlying plus merchantability telephone options to cod premiums portion limiting their downside. The telephone enactment gives the purchaser to close to bargain the plus wrong a definite period. As the seller of the telephone holds the underlying asset, if the enactment is exercised, they merchantability their assets astatine a predetermined price.

These covered telephone strategies, Ismail said, are “actually utilized arsenic portion of a hazard absorption attack during specified a time, but they whitethorn not beryllium perfect if determination are breakout expectations.”

However, helium added that determination are different suggestions retired there:

“Other strategies that investors tin usage see Bull Call Spreads, Short Iron Condors and Short Iron Butterflies. But for these strategies to work, a trader indispensable person a coagulated knowing of options trading and the associated risks.”

A coagulated knowing is an understatement, arsenic often adjacent experienced marketplace participants neglect to spot each possibility. Market-neutral strategies, nevertheless, are attractive, and their options are increasing successful the space.

Indeed, successful July 2022, for example, Coinbase published a blog post showing how perpetual futures contracts could beryllium utilized to “achieve a precocious instrumentality connected investment” by taking vantage of “positively skewed backing rates” successful the market.

While these strategies tin beryllium charismatic during periods of debased volatility, determination are inherent risks associated with them. Coinbase’s blog station mentions the usage of perpetual contracts connected FTX, a level that has since collapsed. Other risks see a imaginable surge successful volatility, risks associated with a level getting hacked and regulatory risks.

Investors looking for added returns are encouraged to bash arsenic overmuch probe arsenic imaginable erstwhile exploring their options. Another enactment to see is an added instrumentality a boost successful information practices that helps support tokens distant from hackers.

What happens aft Bitcoin trades similar a stablecoin?

Asked astir his imaginable outlook for Bitcoin and the wider cryptocurrency marketplace implicit the adjacent six months, Ismail noted that the marketplace is “searching for its adjacent terms catalyst,” arsenic marketplace conditions amusement “investors are accumulating BTC astatine little levels.”

He speculated that arsenic marketplace sentiment shifts, there’s an accrued likelihood of a important terms movement, particularly taking into relationship the halving lawsuit successful the archetypal fractional of adjacent year. Ismail added:

“With Bitcoin remaining the main driving unit down the industry, the question of the largest crypto volition find the destiny of altcoins and the wide market.”

Sarwate said determination is simply a “palpable optimism successful the crypto space” contempt the accrued regulatory scrutiny. This twelvemonth has been a “steady watercourse of inspiring technological breakthroughs and discoveries that are reinvigorating the integer plus space,” she said.

She noted that erstwhile it comes to Ethereum, thriving layer-2 ecosystems are improving its functionality, portion the recent Shapella upgrade enabled staking withdrawals successful conscionable “one successful a bid of occurrence improvements that are mounting disconnected waves of positivity wrong the community.”

As for Bitcoin, Sarwate pointed retired that Ordinals inscriptions are “kicking up a batch of particulate arsenic idiosyncratic satoshis person taken halfway signifier successful the NFT debate.” On apical of that, Bitcoin’s adjacent halving lawsuit is occurring adjacent year, she said, which is helping make and restructure debates astir its future.

So, what does each of this mean for semipermanent investors? According to Ismail, a batch of those with a beardown condemnation whitethorn “end up puking their positions aft holding done 70% to 80% drawdowns.” While helium said it’s important to instrumentality profits, investors should debar panic selling and ever person an exit strategy.

The marketplace cycles request to beryllium kept successful mind, helium said, adding:

“While successful bull markets, it whitethorn consciousness arsenic if the marketplace volition lone spell up and that this clip is different, but erstwhile the carnivore markets hit, prices whitethorn autumn 90%. Both marketplace states are not permanent.”

Some semipermanent investors recognize this and presumption tight-range trading periods arsenic “an accidental to adhd to their positions astatine discounted prices.” Per Ismail, the cardinal is not to usage leverage and past these “boring times.”

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Horejsi seemingly concurs, stating that those who person survived 1 oregon 2 carnivore markets already cognize “where to acceptable limits and person astir apt acceptable them agelong ago.”

“Also, astir long-termers didn’t spell all-in with leverage but person immoderate much blimpish investments, too, truthful the contiguous request to liquidate isn’t that strong.”

As regulatory clarity improves and cryptocurrency adoption grows, helium said, helium feels harmless to accidental that crypto is “here to stay.” For those who bash judge that it is present to stay, waiting retired less-volatile periods whitethorn beryllium the mode to go, whether they take to accumulate much oregon not.

If they opt to lend, instrumentality vantage of market-neutral strategies oregon simply hodl successful acold storage, their choices are to beryllium based connected idiosyncratic hazard appetites. Surviving carnivore markets is what helps investors payment from bull markets, aft all, truthful immoderate helps get done the reddish candles and avoids losses is seemingly an option.