Assessing Bitcoin's baseline demand through trading and volatility

Bitcoin’s volatility has hit this year’s low point, and with it, trading volume. The relationship between volatility and trading volume is one that has been closely looked at in traditional financial markets helping assess when markets return to equilibrium.

Despite Bitcoin still showing higher volatility than all traditional asset classes, the current status over the past few months has left the cryptocurrency bound just below the psychological barrier of the $10,000 mark. The status-quo holding now for nearly 2 months has left pundits scratching their heads. But the data shows that there is still plentiful opportunity for astute traders.

Markets since 2017 have evolved as derivative volumes now dwarf spot markets. These leveraged products seemingly add more liquidity. And the traditional notion is held that with volatility increases trading volume.

ZUBR takes a deeper look at how Bitcoin’s volatility and trading volume has affected demand and supply markets since the cryptocurrency hit its all-time-high.

Key Takeaways:

Bitcoin's daily opportunity remains very high when considering the potential to both long and short. The cryptocurrency almost mirrors any advance or retreat every day.

The majority of the time, Bitcoin will almost mimic the exact percentage increase with a percentage decrease on the very same day. In fact, this happens 25% of the time and coming in a range between 0-1% (i.e. if Bitcoin increases 10%, it will likely decrease between 9-11%).

Despite Bitcoin's volatility nearing 1% at the time of writing, the intraday arbitrage opportunity remains in the 2-3% realm.

These statistics are constant since even 2017. The mirroring behaviour of Bitcoin of swings north and south highlights the very nature and character of Bitcoin as an opportunity to gain from both short and long on a daily basis should history be an indicating factor in traders strategies.

Rolling volatility stands between 2 and 4% two-thirds of the year on average. Data analysis by ZUBR shows that the opportunities are still fairly large for the consistent traders choosing the right side at the right time.

Volatility doesn't necessarily mean higher trading volumes. In fact, the majority of trading volume on both derivative and spot markets happen when the difference between the "Opening price" and "Closing price" are under 1%.

As far as the daily opportunity goes, the majority of the time traders are looking at a 4-5% arbitrage from low vs high based on Bitcoin's 30-day rolling volatility of 2-3%.

Higher volatility does not mean higher trading volume/liquidity. In fact, the majority of trading happens when the opportunity is in the 4-5% arbitrage range.

An important aspect within the traditional financial sector that becomes highly visible in stock markets is the effects of information. Information about a certain company can lead to volatility shocks for that specific stock. Such information shocks are less evident with Bitcoin which has had an asymmetric response to favourable or less favourable information, especially when considering round-the-clock global markets.

Data provided by CoinAPI, and further analysis by ZUBR, shows that Bitcoin while volatile compared to traditional assets, has a certain market equilibrium character to it the majority of the time. What can be seen is that the daily opportunity on the positive (long) side is likely to see almost the same opportunity on the negative (short) side - e.g. If Bitcoin’s price increases 10% from open, it is also likely to see a 10% decline from the opening price too – or vice versa (see chart 1).

Bitcoin: Daily % Change from Open-to-High and from Open-to-Low

The data shows that Bitcoin daily swings almost mirror each other. This insight into the daily movement of Bitcoin is an aspect that traders are likely to be able to take advantage of when assessing their strategy.

A closer look at the data on the swings shows that the majority of the time the mirror effect happens within the day. To illustrate this mirroring character, ZUBR extrapolated that should the percentage change from open increase by 10%, it will likely see a 10% decline during the same day – hence what ZUBR calls the equilibrium swing (see illustration).

Chart 2 below indicates that 30% of daily swings will mimic each other and either fall short by -1% or increase by 1% from reaching a perfect equilibrium swing.

What the data is effectively indicating is lower risk opportunities are possible if one is to trust the historical events and deem such swing intrinsic to Bitcoin’s trading character. For example, should Bitcoin increase by 10% and retreat back to its opening price, history indicates that there is an overwhelming chance (over 50%) that the price drops between 9-12% within the same day or following day. Chart 1 is a testament to this very trend.

Bitcoin: Daily Swings Near Equilibrium Majority of the Time (See Notes) %

For visual purposes, the above chart has been broken down below for each year and number of days showing how close to an equilibrium swing was reached on a daily basis. What is telling is the fact that year-on-year, the trend remains intact cementing the mimicking nature of Bitcoin.

Furthermore, it's important to note that the data also highlights that the swings are larger on the negative (short) side. This indicates that the downward price forces are always much stronger than the upward forces.

2017: Difference Between Daily High and Low (#  Days vs %)

2018: Difference Between Daily High and Low (#  Days vs %)

2019: Difference Between Daily High and Low (#  Days vs %)

2020: Difference Between Daily High and Low (#  Days vs %)

It’s important to understand that the metric for volatility commonly used is 30-day rolling volatility assessed on the closing price. However, this metric might not be all that meets the eye after all in telling of the daily swings of Bitcoin.

In 2019, when Bitcoin’s 30-day rolling volatility was between 2-3% (Gold in comparison averages below 1%), the daily opportunity from low to high (or high to low), was above 5% (see chart below). These intraday opportunities remain much higher than in traditional markets. Day-to-day pricing, however, can make Bitcoin's volatility seem low in comparison to its historical swings.

2019: Total Arbitrage Opportunity % (y-axis) vs 30-Day Rolling Volatility % (x-axis)

The majority of the time, year-on-year, Bitcoin’s rolling volatility stays between the 2 and 4% mark. In 2020, up till the end of 2Q, Bitcoin’s volatility fell between this bracket two-thirds of the year despite seeing almost record volatility during March (see chart below).

Bitcoin 30-Day Rolling Volatility Brackets (Days vs %)

Higher trading volumes have generally been an assumption made when volatility increases. However, the data indicates otherwise for Bitcoin. ZUBR looked at major futures and spot market trading and found that nearly half of trading volumes happen when Bitcoins prices opens and closes between 0 and 3% of each other in any direction (see charts below).

Bitcoin Spot Markets: % of Trading Volume By Open vs Close Difference (1 Jan 2017 up to 31 June 2020)

A short-coming in the total assessment seen in the charts about is that there could be major volatility within the day, but the “closing bell” is close to the opening price.

As such, ZUBR delved deeper into the data to assess when the most trading activity took place and when. The data shows that the majority of trading volumes actually happen when the opportunity ranges between 3 and 10% throughout the day from high-to-low (or vice versa).

Trading volumes at higher volatility remains to be a very small percentage of the total trading volume happening.

Bitcoin Futures: % of Trading Volume By Open vs Close Difference (1 Jan 2017 up to 31 June 2020)

Although Bitcoin has a volatile outlook, the trending pattern of equilibrium swings shows that the cryptocurrency has a near and neat symmetrical trading character. Increases or decreases in the price of bitcoin is almost mimicked on a daily basis allowing for a much more thoughtful and less risky trading strategy when the percentage change is large enough.

While the opportunities for Bitcoin can be large several times a year, traders seem to be more reserved than one might expect. The largest trading volumes actually happen during times of lower volatility between the "opening" and "closing" price.

This indicates the importance of speed in order to be able to access liquidity during the periods of lower volatility.

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