Chart for BTC/USD (1D)
Bitcoin (BTC) has been hovering around $ 6,400 for a long time now. Volatility has dropped significantly and the price is trading in a very tight range. The last time this happened, we saw the beginning of a new cycle. However, most Bitcoin (BTC) investors who have not been around for long refuse to believe that. So, let us analyze the implications of a decreasing Bitcoin (BTC) volatility without any bullish or bearish bias. Volatility in the cryptocurrency market is a trader’s best friend. If you are someone who likes to buy and sell on a regular basis instead of storing your coins in an offline wallet, you would love to see volatility in the market. That way, you can buy the dips and sell the rallies while going with the flow.
If we look at the above daily chart for BTC/USD, we can see one big dip followed by smaller dips. That big dip is called Bitcoin (BTC)’s February low. As investors and traders realized that Bitcoin (BTC) is about to undergo a correction, they sold in large volumes. After the price hit the February low, some investors started to think the correction was over. The buying led to a rally which then led to an alternating sequence of rallies and sell offs. There were many investors who bought the dips and transferred their coins to cold storage. They were happy with the price they bought at and they did not bother to sell the rallies. In fact, they bought more dips along the way. Now, most of these investors were professionals who were waiting for this correction to happen.
When the price started to fall, these investors started to buy on OTC (over the counter) markets so as not to influence the price on exchanges. At this point, the major buying and selling was done by the traders. They did not have their money in offline wallets. They were day trading on big exchanges constantly buying the dips and selling the rallies. As the price continued to decline, the traders felt more confident in their trades. The buying and selling was done over a larger range as the volatility was high. However, as Bitcoin (BTC) started to make higher lows around July, the volatility received a big blow as traders became less interested in selling.
Chart for BTC/USD (1M)
The money that was in the market to trade did not change. Most of the trading on big exchanges is done primarily by bots. Most retail traders have already stopped trading. If they trade under such conditions, they are likely to get burnt and they know it. However, the bots that are trading with big money can still make enough money with small double digit moves. So, as the price falls below $ 6,400 they buy and as the price rises significantly above $ 6,400 they sell. Now, why do these bots sell at slightly above $ 6,400? Why don’t they sell at much higher prices? To answer that, we need to understand the psyche of the people they are selling to. The people that buy from these bots are either other bots or a small number of investors. These are not the people that influence the price.
Price is influenced by big money which has two types. One is smart money and the other is dumb money. Smart money comprises of large financial institutions and investors who have a lot of buying to do. They cannot just go and place their orders on exchanges. That would drive the price of Bitcoin (BTC) to the moon and then they wouldn’t be able to buy at low prices. So, they buy offline on over the counter markets. So, these people do not directly affect the price of Bitcoin (BTC) on exchanges. Now, the second type of investors in the market is the dumb money investors. They are not going to buy while the prices are low because they are afraid the price might fall further. They are not going to start buying until the price is close to where it fell from. So, soon as the smart money is done buying, they place some orders on exchanges to sucker the dumb money in. Thus, a new market cycle begins and everyone goes back to talking about what a promising investment Bitcoin (BTC) is.
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