Incremental volatility in crypto is likely on the horizon, predicts Kraken market report

Global digital asset exchange platform Kraken launched its report on Bitcoin volatility. In its report for August, Kraken found that a surge in July volatility trickled into August, driving annualized volatility up to an intra-month high of +60% and causing month-over-month volumes to jump +53%.

Bitcoin remained in range between $10,590 and $12,480 for the month, before finishing up +3% at $11,657. This resulted in the weakest monthly positive return since 2017.

Bitcoin’s strong, positive correlation with the S&P 500 and gold persisted into August and climbed as high as 0.84 and 0.97 before plunging to -0.02 and 0.25, respectively, said the report.

The ascension of Bitcoin’s correlation with gold to 0.97 marked an all-time high.

A rally to an intra-month high of $12,480 coincided with Nasdaq-listed MicroStrategy announcing a $250 million Bitcoin purchase as part of a new “capital allocation strategy,” Berkshire Hathaway purchasing a majority stake in Barrick Gold mining company and gold rallying to an all-time high of $2,075/oz.

A number of lesser-known market dynamics suggest incremental volatility is likely on the horizon, predicts Kraken. For example, annualized volatility reverted to the mean after falling as low as 15%, while U.S. equities continued to climb. This coincided with a multi-year low for Bitcoin’s dominance and a record number of BTC remaining untouched for over a year.

What does that mean we watch out for? Negative returns in September for starters, says the report. Historically, September is Bitcoin’s worst-performing month, with an average return of -7%. With Bitcoin underperforming its average monthly returns for most of the year, we could see returns below -7%.

Also watch out for the ‘suppressed pocket’. Twelve times in the past, Bitcoin’s annualized volatility bottomed between 15% and 30% before climbing, on average, to 140% and returning +196% over 94 days. As of the end of August, 38 days have passed since the volatility low of 23% set on July 24, with volatility rising to 44% and price gaining +25%. So, history indicates that we may have ample room for higher volatility and gains in the months ahead.

Although alternative cryptocurrencies have been stealing market share from Bitcoin since the start of 2020, especially with the emergence of DeFi in Q2, and the trend is likely to continue, one could also see an eventual rotation back into Bitcoin amid a reclamation of dominance, says the report.

Kraken, considered among the world’s most secure cryptocurrency exchange platforms, is trusted by more than 4 million traders, institutions and authorities, and they’ve processed over $90 billion in total trades (over $2 billion by its OTC desk).

Photo by Aleksi Räisä on Unsplash

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