Crypto volatility may soon recede despite high correlation with TradFi

After forging a minor recovery of sorts earlier this month, the crypto market has returned to exhibiting high levels of volatility over the past two weeks. This trend has pervaded the market since late last year, with the total market capitalization of the digital asset industry having dipped from an all-time high of $3 trillion back in November 2021 to its current levels of $1.08 trillion, representing a drop of over 65%.

This then begs the question: How long is this volatility going to last? Especially since the macroeconomic conditions surrounding the global finance sector have continued to deteriorate steadily since 2020 — i.e., following the start of the COVID-19 pandemic.

In this regard, Abdul Gadit, chief financial officer of automated digital asset trading platform Zignaly, told Cointelegraph that whether one likes it or not, the crypto market is now deeply connected with the traditional finance (TradFi) economy, with the two now beginning to follow a similar trajectory.

In his view, the reason for the ongoing choppy price action and lack of liquidity is extreme retail and institutional caution emanating from rising inflation and recessionary pressure. He went on to add that whenever things start to go south with the economy, investments — especially within the realm of crypto finance — tend to start slowing down. Gadit added:

“Right now, global markets are in the middle of this bearish cycle with the crypto industry getting tighter in terms of its trading ranges. This price action can continue for weeks, if not months unless there is a macro environmental change. Chances of that are fairly low.”

What lies ahead for the crypto market?

Andrew Weiner, vice president of VIP services for cryptocurrency exchange MEXC Global, told Cointelegraph that even though the cryptocurrency market is closely correlated with United States equities, an industry that has remained quite stable over the last few months, there is still a lot of volatility due to growing action within the crypto derivatives segment. However, he said that the crucial narrative dictating the price action of the digital asset sector — at least for now — is the Ethereum 2.0 Merge, adding:

“After the recent discussions surrounding the Merge, the market seems to have totally priced in its effects. If we look at things from a fundamental analysis view, the market has stopped bleeding and is getting ready to start recovering.”

To support this claim, Weiner alluded to his company’s research data, which suggests that from Aug. 8 to 14 alone, a total of 19 projects within the Web3 space raised a total of $501.3 million.

He pointed out that of this figure, the Metaverse, nonfungible tokens (NFTs) and GameFi projects raised $82, while decentralized finance (DeFi), Web3 and infrastructure projects raised a combined $379.3 million. Lastly, various blockchain firms were able to accrue approximately $40 million from various venture capital firms. “Fundraising events are actively going on, which is a good sign of the market,” he added.

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Charmyn Ho, head of crypto insights for digital asset trading platform Bybit, explained to Cointelegraph that global markets are experiencing volatility, as investors seem to be on the fence following the Fed’s Jackson Hole speech. She noted that with equities riding many highs and lows over the past two weeks, the global economy’s near-term outlook remains quite obscure, especially as consumers, investors and policymakers can’t seem to agree on whether the U.S. is in a recession or if the Fed has inflation under control. Talking about the crypto market, in particular, she added:

“The main event riding price action is Ethereum’s Merge. Some actors, mostly miners who won’t be able to continue their operations on the post-Merge chain, are planning to keep the proof-of-work Ethereum blockchain going through the hard fork. All this has the ability to impact short-term prices. With Ether being the second largest cryptocurrency in the space, its price movements certainly possess the capacity to move the crypto market.”

Is the ongoing volatility going to subside anytime soon?

Himran Zerhouni, head of business development for decentralized creator-oriented Web3 platform Favor Labs, told Cointelegraph that the ongoing turbulence is largely driven by macroeconomic factors, primarily high inflation in the U.S. and Europe and the risk of a looming global recession. 

Additionally, he believes that the digital asset market is also gripped by certain fears that have been provoked by the tightening of crypto regulation and the clear desire of world regulators to fully control the cash flows in cryptocurrencies. However, Zehrouni sees this trend potentially changing in the near-to-mid near term, adding:

“Over the coming year or so, the regulatory turbulence around stablecoins will subside. I suppose clear legislation for stablecoin issuers in the United States will emerge. The growing interest of users in the advantages of web3 and decentralization will push entire industries to adopt digital assets. Lastly, the Bitcoin halving in 2024 will inevitably lead to a new bull cycle in the crypto market. I believe it will start somewhere in the second half of 2023.”

Andrei Grachev, managing partner at DWF Labs — an early-stage blockchain investment firm — highlighted to Cointelegraph that crypto volatility has continued to subside, albeit slowly, in recent weeks, claiming that we are already at the downside of the current bear market cycle. That said, in his view, Bitcoin (BTC) could still go lower than its current levels, but its near-to-mid-term upside opportunity continues to remain extremely high.

As per DWF Lab’s in-house research data, after hitting an all-time high of near $70,000 last November, BTC can potentially scale up to around the $80,000–$90,000 mark when the next bull cycle commences. However, he did concede that since crypto, by its very nature, is volatile, there is little to suggest that volatility levels will decrease in the immediate future. “This is mostly due to the size of the market, which is relatively small compared to other traditional industries,” he said.

Technical data is giving mixed signals about Bitcoin’s future

According to CK Zheng, partner and chief investment officer for crypto hedge fund ZX Squared Capital, when examining Bitcoin’s 30-day realized volatility over the last twelve months, one can see that it has continued to range between 40% to 100%, staying at an average of around 70%. Realized volatility refers to the variation in returns associated, calculated by analyzing its historical returns within a defined time period.

As seen from the chart below, volatility spiked right after Singapore-based crypto hedge fund Three Arrows Capital — which had about $10 billion in assets under management — filed for bankruptcy in late July. Zheng to Cointelegraph:

“The current volatility is about 10% below the average. However, we believe the volatility will increase during the Sept-Oct time period to be above the average. This is mainly due to the market’s reaction to the Fed and a potential re-test of the June low.”

Similarly, Weiner believes that with BTC having dropped below the $22,000 level but continuing to find strong support in that range, he sees the flagship crypto — as well as the market at large — forging a trend reversal and scaling up to around $25,000 to $26,000 by mid-September. 

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Lastly, Ho believes that the stabilization of digital asset prices in the near term is not immune to macro market uncertainty, but what is apparent is that, as the crypto market matures, investors and market makers can count on deeper liquidity, better trading and security infrastructure across the board and more stable crypto space. She stated that much of the turbulence experienced by the crypto market is due to the small market capitalization of the asset class, stating:

“Bitcoin is the largest crypto asset and has a market cap of over $400 billion. This is very small compared to most mature markets. Take gold, for example, which has a market cap of $11.6 trillion. When the crypto market grows to that level, perhaps volatility will reduce drastically. For now, it is important to note that just like other markets, there will always be an array of factors that can contribute to market volatility.”

Therefore, as we head into a future plagued by a growing amount of financial uncertainty, it will be interesting to see how the digital asset industry continues to react to the prevailing pressure and whether or not it can forge an uptrend anytime soon.