Bitcoin’s low volatility doesn’t necessarily mean low risk
Bitcoin is currently experiencing a period of low volatility, which some market participants mistakenly interpret as a reduction in risk. Analysts warn that this stability can encourage excessive leverage, potentially leading to sharper price swings if market conditions shift.
Why it matters
Understanding the relationship between volatility and risk is crucial for investors managing exposure in the cryptocurrency market, especially during periods of low trading volume.
A key theme this month is not just that bitcoin BTC $ 64,577.89 isn’t taking part in the risk-on rally exemplified by stocks, it’s how steady the cryptocurrency has been, to the point that 30-day implied volatility has dropped to a long-held floor of 36%.
More often than not, low volatility is taken as a sign of low risk. After all, if an asset isn’t swinging wildly, it must be safer, more predictable than one that is gyrating rapidly. In recent weeks, BTC has looked far steadier than South Korea’s Kospi index, for example.
But that only tells us what is, not what could be. In other words, low volatility is no reason to let your guard down. When volatility is cheap, trading becomes cheap, encouraging punters to build large directional bets and hedging positions. That leaves the other side, the market makers, with a lot of exposure too.
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