Who pulls the trigger on Bitcoin’s volatility?

The volatility that drove Bitcoin’s price below $31,000 has now brought it up to the $33,000-level, based on CoinMarketCap. In previous market cycles, the volatility has shown a cyclical nature. However, in the current market cycle, it depends on the momentum and activity of institutional investors.

Back in 2018, there was institutional participation. Alas, the momentum was high for only a short period of time and the short-term volatility was what led to a massive drop on the charts. More than the price, the perceived value of Bitcoin has had an impact on the current volatility. Since there was accumulation at the $34,000-level by most institutions and whales, the price was soon heading towards the $34,000-level on the charts again.

Bitcoin Volatility || Source: Woobull Charts

Another metric, the active supply that increased significantly over the past 2 months, more so in 2021, may have led to increased volatility and the price drop on spot exchanges. A high active supply can be equated to increasing sell pressure. The price fluctuates in response to the cascading sell-off, and this is what happened during the “double-spend” sell-off on Thursday.

As demand for Bitcoin on spot exchanges is revived, sell-pressure is expected to ease off. In the current market cycle, institutional investors are pulling the trigger on volatility, even though the sharp sell-off on Thursday raised more questions on the sustainability of the price rally.

However, post the aforementioned price decline, Bitcoin made a comeback with 24-hour gains of over 5%, with the same trading at $33,460, based on CoinMarketCap, at press time.

In light of the inflows of investments into institutions’ Bitcoin products, it is likely that there may be an increase in demand and consequently, in volatility, leading to a short-term top in Bitcoin’s price.

Grayscale’s Bitcoin Holdings || Source: bybt

When the price dropped, Grayscale added over 4% new Bitcoins to its holdings. Despite the significant drop in prices, institutions are not seen liquidating their holdings and if they continue to HODL, the price may continue on its onward trend. The immediate challenge is that of active supply on exchanges and that may drop once OI on derivatives exchanges increases to the level before the drop. This may occur post the Bitcoin Options expiry at the end of January. An increase in trade volume and volatility by institutions may lead the way.