Uncertainty creates widespread market volatility – Bitcoin Magazine

by James · October 5, 2022

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Word of the day: Volatility

Are you prepared for increased volatility? It is common for markets to only become more volatile as we move deeper into bear markets. As uncertainty, illiquidity and impatience increase, more market participants begin to hope for market extremes: either that the market has bottomed out and another bull cycle is one Federal Reserve pivot away, or that the bottom line, margin call liquidation day will happen immediately due to a Credit Suisse collapse. Everyone hangs on edge with every major market move to give them some sort of signal. The price ranges are starting to expand, and some (will be) weekly or monthly moves are being compressed into just a single day of action.

Even arguably one of the best investors of all time, Stanley Druckenmiller, finds today to be one of the most difficult environments to figure out:

“I’ve been doing this for 45 years, and between the pandemic, the war and the crazy political response in the United States and around the world, this is the most difficult environment I’ve ever encountered to try and have confidence in a forecast six to twelve months ahead .”

For most, it is best to sit out and have a large risk-off position, ready to be deployed after the markets have stabilized or calmed down.

We remain of the same view that further lows are likely to come and that we have yet to come to a final conclusion yet for the equity, risk asset and bitcoin cycle.

We want to remind readers of the scale of bear market rallies that we have seen so far and the scale of those rallies in 2000 and 2008 analogues. There are other cycles to study and compare, but these are just a few recent examples.

We’ve already seen a significant 17.41% rally from the SPX low with bitcoin going to $25,000. Still, that didn’t change the next reversal lower, and what we think is that the medium-term downside is still playing out. Even in the most recent collapses of 2002 and 2009, the S&P 500 saw rallies over 20% before going lower. As the market piles in to short bloody relationships and doomsday news on higher leverage, remember there’s no free lunch.

S&P 500 rises from 2022 lows

S&P 500 rally from 2007-2009 lows

S&P 500 rally from 2000-2002 lows

Another interesting point to note is that bear markets are usually short, lasting 10 months on average. The 10-month benchmark would roughly put us where we are today. Nevertheless, it is a useful idea and thesis to make that the current destruction we have seen so far has been about the transition to a unique and historic time for interest rates, bonds and credit. We have hardly even arrived at what is classic and cyclical earnings carrier market.

As bonds, currencies and global stocks have all continued to trade with increasing levels of volatility, the recent historical and implied volatility of bitcoin is eerily muted by historical standards.

While the lack of recent volatility in bitcoin may be a sign that much of the leverage and speculative mania of the bull market has almost completely washed out, our eyes remain on the oversized legacy markets for signs of fragility and volatility, which could serve as a short/ intermittent headwind.

While the world around bitcoin’s price action appears to be increasingly uncertain, the Bitcoin network remains completely unaffected at the protocol level, continuing to do its job as a neutral monetary asset/settlement layer, despite exchange rate volatility.