Key Insights:
- A standard deviation-based indicator is showing a bullish volatility signal similar to the one seen in early November.
- Bitcoin (BTC) is currently trading between Bollinger volatility bands.
Bitcoin (BTC) traders could be gearing up for another exciting phase. A significant technical indicator that previously predicted November's price surge has returned to its former position, suggesting a potential volatility explosion in the near future.
This indicator is the Bollinger bandwidth, a tool that helps assess expected changes in market volatility. For Bitcoin, the bandwidth has contracted to below 10%, a mark not hit since November 4, the day before the U.S. elections, when the leading cryptocurrency skyrocketed from $70,000 to $100,000 within four weeks.
Bollinger bands illustrate levels two standard deviations above and below an asset's 20-day moving average price. The bandwidth reflects the distance between the upper and lower bands; rising values indicate increased volatility and vice versa.
Volatility tends to revert to the mean, and historical trends suggest that when the daily bandwidth drops below 10%, it often foreshadows upward movements followed by heightened fluctuations. It's crucial to recognize that volatility does not favor price direction; significant shifts can occur in any direction. For instance, when the bandwidth fell below 10% in early June, BTC prices plummeted from $69,000 to $54,000 in just three weeks.
Experienced traders typically wait for the market to assert its direction by breaching either of the two bands. A rise above the upper band generally hints at a bullish volatility surge, while a drop below the lower band indicates the contrary.
As of the latest update, BTC is hovering between the two bands with minimal direction provided. Nevertheless, the chance of increasing volatility could entice astute traders to place derivative bets aiming to profit from price oscillations in either direction.
