Bitcoin volatility is back to pre-banking crisis lows, but crypto futures show investor optimism is building

Published Tue, Apr 25 202311:04 AM EDTUpdated Tue, Apr 25 202312:19 PM EDT

Bitcoin trading has returned to the stillness that characterized the market before U.S. banks went into crisis last month and became a major upside catalyst for crypto. Almost a week ago, bitcoin began a three-day descent below $30,000 after just a few days above the mark. It has been trading sideways ever since. Meanwhile, bitcoin and ether volatility have fallen to below early March levels. Even "implied volatility," which uses options data to show the market's forecast of a likely movement in an asset's price, is moving lower, according to Kaiko. However, bitcoin is still holding at a current resistance level watched by some chart analysts , and market participants say investors' optimism has survived despite the volatility drop. "There remains bullish sentiment in bitcoin as the futures market is in contango," said Michael Dunn, chief product officer at Bitnomial. This means traders expect bitcoin prices will increase and may be willing to pay a premium for longer-dated futures contracts in anticipation of those higher prices. The opposite was true at the end of 2022. Traders expected future prices to be worse than the prevailing spot rates, said Luuk Strijers, chief commercial officer at crypto derivatives exchange Deribit. Dunn said spread prices have come off the highs in the past week, which could signal range-bound trading in the short term. The changes in the charts coincide with a shift in bitcoin's narrative. The banking crisis opened many investors' eyes to the range of bitcoin's nonspeculative use cases, specifically its potential as an alternative banking system. However, investors' fears about a looming recession have come back into focus . As worries about U.S. banks have waned and inflation has eased, some are concerned the fallout from the U.S. banking crisis could tilt the economy into recession this year. Plus, inflation is still above where the Federal Reserve feels comfortable . The drop in bitcoin volatility also comes as the stock market's "fear index," the Cboe Volatility Index , has fallen to about 17 from 26 at the height of the banking crisis. New catalysts for volatility While the banking crisis briefly put some life back into the crypto market , tension between the crypto industry and U.S. regulators remains as a dark cloud over it. David Wells, CEO of Enclave Markets, said that could spell more near-term volatility. Even before the Securities and Exchange Commission's regulatory crackdown on crypto businesses began in January, the industry has been frustrated over the agency's lack of clarity about how startups should be regulated and its propensity to regulate through enforcement actions. In the last week, exchanges Coinbase and Gemini have taken steps toward offshore expansion. "If the current trajectory continues with U.S. banks having a hard time supporting crypto infrastructure companies , that will lead to more volatility because you still have somewhere around half the market that is North America-based," Wells said. "Liquidity is so concentrated, and with some of the other larger market makers and institutions in the space dialing back on risk, that concentrates liquidity risk even more into the largest venues" like Coinbase, he added. BTC.CM= 1M mountain Bitcoin (BTC) below $30,000 Market participants were further discouraged last week as SEC Chair Gary Gensler defended both his crackdown and his approach to the crypto industry. On Monday, Coinbase filed a legal challenge against the SEC, hoping to force it to publicly clarify whether it would allow the crypto industry to be regulated using existing SEC frameworks, after months of silence from the agency. Riyad Carey, research analyst at Kaiko, said he's looking a little further out for bitcoin's next big driver — to the next halving , a year from now. "The next major crypto-specific catalyst on the horizon is likely bitcoin's halving," he said. "Dropping volatility … seems to be a reflection of the lack of crypto-specific catalysts in the near future. Ethereum's upgrade passed without any real fireworks and we seem to have gotten a respite from crypto companies collapsing for now."