Cryptocurrency markets are well-known for their volatility, with large price fluctuations that can make or break investors. However, there are often times of relative calmness, which can be dull for some but provide an opportunity for others.
Since the start of the year, the price of Bitcoin (BTC) has increased by more than 60%, going from around $18,000 to above $27,000 at the time of writing. Nevertheless, the digital currency has been moving in a limited range for the past two months, varying between $26,000 and $29,000. It has had several attempts to go beyond $30,000 but also experienced drops to $25,500.
According to CCData, the volatility of Bitcoin has decreased to 48.2% in the current year, which is lower than the 62.8% of last year and 79% of 2021. The average daily change of the cryptocurrency has been consistent, with 1.68% gains and 1.93% losses.
Investors have a range of possibilities open to them for generating more returns during times of low volatility, such as lending their tokens through DeFi protocols or centralized exchanges. Additionally, they may opt for staking or more sophisticated strategies involving derivatives like options and futures.
Given the unpredictable nature of the cryptocurrency market, this period of stability is noteworthy. In the past, periods of stability have often been followed by major price fluctuations, either positive or negative. However, this does not mean that investors cannot employ strategies to improve their returns.
Crypto traders are expecting low volatility
The most common tactic during these times is to simply hold onto tokens until the market turns positive, but there are a variety of techniques that can be employed while the market is stagnant, such as market-neutral approaches that can be beneficial if one is able to anticipate when the market will start to move again.
David Duong, head of institutional research at Coinbase, told Cointelegraph that the restricted trading in the crypto market was, in part, due to a strong U.S. dollar pullback, with many traders sitting on the sidelines “awaiting a definite pattern to show up.”
Duong remarked that “many digital assets are still trading within well-defined ranges,” noting:
The opinion of a Coinbase executive suggests that there is not much anticipation for large fluctuations in the value of both Bitcoin and Ether (ETH). Duong emphasized that Coinbase is “optimistic about Bitcoin and the crypto market in general within the next 6-12 months, based on our observations of the Federal Reserve and the macroeconomic environment.”
Ahmed Ismail, the CEO and originator of crypto liquidity aggregator Fluid, informed Cointelegraph that during these times, range trading is an “especially appealing approach” that seeks to “benefit from cost fluctuations, and limited cost activity can give more exact section and exit focuses for range traders.”
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Ismail stated that following periods of sharp price fluctuations due to major events, flat price action usually ensues, and traders are currently keeping an eye on a few potential triggers, such as the potential failure of U.S. regional banks and the Federal Reserve’s upcoming decision on short-term interest rates.
Becky Sarwate, the head of communications and branding at CEX.io, a cryptocurrency exchange, noted that during times of “stablecoin-like activity,” traders have the opportunity to take a step back and reassess their strategies or explore other options within the crypto space.
Sarwate noted that Bitcoin also experienced a period of consolidation and decreased volatility in January 2023 before rallying, but cautioned that traders should be wary of relying on past occurrences, adding:
Konstantin Horejsi, the chief product officer at Blocktrade cryptocurrency exchange, commented that these small price fluctuations have an effect on short-term trading but assured Cointelegraph that those who trust in the long-term potential of digital assets are still holding onto them or using dollar-cost averaging strategies to purchase them.
Traders expecting lower volatility may influence trading volumes, but this does not necessarily mean that nothing is taking place, as there are a variety of tactics that can be employed during these times.
Managing risk during sideways markets
When questioned concerning what methods can be employed to control risk during times when the market remains stagnant, CEX.io’s Sarwate declared that price consolidation and bear markets “can be opportune times to reconsider and potentially adjust one’s cryptocurrency portfolio.”
To Sarwate, these stretches of comparative steadiness can “supply the necessary space to make tactical decisions.” According to CEX.io’s market research group, the customary and fluid staking chances they have been observing have prompted expanded network inclusion that is “quantifiable across a wide scope of wallet categories” as staking administrations can “give instinctive passages for participants hoping to investigate the computerized economy.”
Stop orders may not be as effective during these times, according to Sarwate, and liquidity shortages could lead to some orders not being completed. Thus, it is essential to understand the levels of resistance and support, she noted.
Ismail emphasized the importance of calibrating risk by determining what percentage of one’s portfolio should be allocated to crypto for the long run, and suggested that the optimal approach was to simply continue to accumulate.
He suggested that increasing cash allocations could be a viable option, and Ismail pointed out that even when prices are not moving, more experienced traders can still find opportunities in options. However, he cautioned that “only a small percentage of options traders are successful.”
Managing risk is a continuous process, so investors should take the time to evaluate and modify their risk management strategies while monitoring their portfolios in accordance with changing market conditions.
When speaking to Cointelegraph, a representative for the prominent stablecoin issuer Tether noted that during times of tight market fluctuations, risk management strategies may include diversifying investments across different assets, implementing stop-loss orders, and monitoring market signals for potential changes.
When markets provide investors with a period of respite, managing risk is clearly a priority, however, as the atmosphere calms, it may be difficult to determine when and if things will become more unpredictable again.
Potential breakout indicators
A representative from Tether stated that investors should watch out for signs such as “escalating trading, growing volatility, or noteworthy news or occurrences that could indicate a breakout from the stagnant prices in both the cryptocurrency and traditional financial markets.”
Ismail affirmed that observing volume is important, as “an increase in trading volume implies that market players are becoming more involved, which usually goes hand in hand with price movements.” He further noted that technical analysis, such as chart patterns, could also give hints of a potential breakout.
Examining potential indications of a breakout, Sarwate delved further, noting that on-chain peculiarities can frequently draw attention in these periods. Unusually large increases in essential variables or increased activity could “seem to indicate an imminent action,” she remarked, continuing:
Whilst traders may use metrics to try and predict the market, which is often discouraged, they can also use the time they have to benefit from their investments.
Using market-neutral strategies
Tether suggests that during these times, market neutral strategies, which attempt to create returns while minimizing exposure to broad market fluctuations in order to decrease the effect of volatility, should be taken into consideration.
Strategies for dealing with cryptocurrency fluctuations can range from straightforward, such as holding stablecoins and earning income through lending, to more complicated methods like selling covered calls. Ismail from Fluid suggests that this latter approach can be especially advantageous during times of stagnant prices.
Alexia Theodorou, head of product at Kraken Futures, informed Cointelegraph that crypto derivatives can be utilized to “maneuver both bearish and sideways markets,” with short-selling providing investors the opportunity to use decreasing prices to their benefit, possibly also forming hedging strategies for their holdings.
Theodorou stated that, for instance, a trader who holds BTC can use it as collateral on a short futures position, which will benefit if the price of the underlying BTC decreases, thus shielding the trader from the decline in price. He further remarked:
She stated that crypto derivatives are ultimately a means of facilitating better price discovery and contributing to the development of more fluid and liquid marketplaces.
Options strategies can provide investors with similar market-neutral approaches. For instance, with covered call options, the holder of the underlying asset can generate premiums while reducing their potential losses. The call option grants the buyer the right to purchase the asset within a certain timeframe. If the option is exercised, the seller of the call will then sell their asset at a predetermined price since they possess the underlying asset.
Ismail stated that these covered call strategies can be employed as a risk management strategy during such a period, but they may not be suitable if there are predictions of a breakout.
He also noted, however, that there are other ideas available.
It is an understatement to say that a solid understanding is required, as even experienced market participants can miss potential opportunities. Despite this, market-neutral strategies remain appealing and the range of options available in this area is increasing.
In July 2022, Coinbase released a blog post demonstrating how perpetual futures contracts could be utilized to gain a high return on investment through the utilization of “positively skewed funding rates” in the market.
Despite the potential appeal of these strategies during times of low volatility, there are some associated risks. Coinbase’s blog post references the use of perpetual contracts on FTX, which has since gone under. Other potential dangers include a sudden increase in volatility, the possibility of a platform being hacked, and regulatory risks.
Investors seeking to increase their returns are urged to conduct extensive research when evaluating their options. Another possibility to contemplate is an increased return achieved through improved security measures that help protect tokens from malicious actors.
What happens after Bitcoin trades like a stablecoin?
Ismail commented that the market is currently looking for a new impetus to push prices up, as current market trends indicate that investors are buying Bitcoin at lower prices.
He conjectured that, as market sentiment changes, there is a greater chance of a major price change, particularly considering the halving event in the initial half of next year. Ismail further stated:
Sarwate declared that there is a “noticeable optimism in the crypto sphere” despite the heightened regulatory oversight. This year has seen a “constant flow of inspiring technical advances and findings that are reinvigorating the virtual asset space,” she remarked.
She observed that Ethereum has been bolstered by flourishing layer-2 ecosystems which have enhanced its performance, and the recent Shapella upgrade enabled staking withdrawals in what she described as “just one of several successful improvements that have generated a lot of enthusiasm among the community.”
Regarding Bitcoin, Sarwate mentioned that the Ordinals inscriptions have been causing a stir as single satoshis become the focus of the NFT discussion. Additionally, she mentioned that the upcoming halving event for Bitcoin is occurring in the next year, which is helping to both create and shape debates about its future.
For long-term investors, Ismail said that those with a strong conviction may suffer significant losses, potentially up to 80%, if they hold on to their positions. He emphasized the importance of taking profits, but cautioned against panic selling and advised having an exit plan in place.
He stressed the importance of taking market cycles into consideration, further noting.
Some long-term investors recognize the value of tight-range trading periods, seeing them as a chance to increase their holdings at reduced prices. According to Ismail, the key is to not employ leverage and endure these “unexciting times.”
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Horejsi appears to agree, noting that those who have weathered one or two bear markets are likely to have already established “where to draw the line” and have likely done so some time ago.
As regulations become more defined and the use of cryptocurrencies increases, he declared that crypto is “here to remain”. For those who think it will stay, enduring less variable times may be the best option, no matter if they choose to gather more or not.
If they choose to lend, use market-neutral strategies, or just hold their coins in cold storage, their decisions should be based on their own risk tolerance. After all, making it through bear markets is what helps investors take advantage of bull markets, so whatever helps them get through the bearish periods while avoiding losses is an option.
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