ETFs have brought more short-term volatility to bitcoin but may help long-term

A big selling point of bitcoin exchange-trade funds was their potential to reduce bitcoin’s notorious volatility over time. But what’s happened so far is that big swings are back in the world of cryptocurrency. Just look at last week. Bitcoin climbed to an all-time high —its first record in more than two years — only to quickly fall by as much as 10% before bouncing back up to yet another new record. The bitcoin 30-day historical volatility index has been sitting at its highest levels in 11 months as leverage in crypto trading has picked up recently. “While one may expect volatility to ease in the long-term upon the advent of ETFs, increased leverage – along with a strong bounce off of intraday all-time highs – has actually led to heightened higher-frequency volatility recently,” Citi analyst David Glass said in a recent note. He pointed to funding rates for bitcoin futures contracts, which have soared recently to levels not seen since early 2021. “These funding rates reflect soaring demand for futures, and therefore to leveraged crypto exposure, perhaps with many not wanting to miss out on the strong price action, especially before the highly anticipated halving event next month,” Glass said. Additionally, open interest, or the number of open positions for a bitcoin futures contract, is at all-time highs. Typically, increased open interest is an indicator of more liquidity, as well as potential volatility. U.S. bitcoin ETFs were first approved and began trading in January and have been touted for their potential to allow investors who are curious about crypto to enter the market in a familiar — and regulated — way. Many investors expect that spiking demand coupled with tightening supply – the upcoming halving event in April will shrink the reward paid to miners’ by half, a scarcity mechanism mandated by the Bitcoin code – will push bitcoin prices higher and higher in the coming months. “Realized crypto [volatility] will likely ease as funding rates normalize,” Glass said. “However, the path to get there could be highly volatile given the increased leverage in the system.” “With more access generally comes more money and interest (à la strong inflows), specifically institutional money,” Glass added. “These dynamics should, in theory, enable more efficient price discovery as volumes (spot plus futures) grow. Portfolio rebalancing, for which we recommend a quarterly frequency, should also have a dampening effect on [volatility].” BTC.CB= YTD mountain Bitcoin’s shifting price so far in 2024. Bitcoin has been rising since the beginning of the year. Investors have warned it could see more steep corrections through March if bitcoin continues flipping between rallies and pullbacks. According to technical analysis of Bitcoin’s price chart, support is at about $48,000, or roughly 33% below the current price after the cryptocurrency hit yet another new all-time high on Monday. Its short-term realized price is at about $42,800, according to CryptoQuant. “Longer term, ETFs will bring steady inflows from retirement account strategies that automatically allocate to crypto ETFs similar to a 401k making automatic investments each month to stocks,” said Enclave Markets CEO David Wells. “Those recurring inflows could dampen volatility of large moves from momentum strategies which basically chase price up and down and amplify swings.” “Anytime you reach a multi-year, all time high, volatility will be higher until that level is broken and becomes [a] new support level,” Wells added. “But the dollar cost averaging nature of retirement and wealth management strategies should bring long-term lower volatility.” —CNBC’s Michael Bloom contributed reporting.