Sophia’s Thoughts on the Low Volatility Cycle
The crypto market has been unusually calm lately. What’s causing this new tranquil crypto reality? And how can investors still profit even when risks are low?
These are Sophia's Thoughts:
The crypto market is currently showcasing volatility that is only a third as high as it has been historically. The market is abnormally calm these days.
Part of the reason for this phenomenon is the customary summer hole. It is currently mid summer in the northern hemisphere. Many investors are distracted with their holiday plans.
But, more than anything, new tension has arisen awaiting actions by the SEC and US legislators. Investors are waiting on regulatory clarity before deciding their next moves.
The low volatility environment makes it hard for investors to identify profitable trades. But Sophia has delivered accurate intelligence for investors to navigate the new calm environment with confidence.
CNBC has put their trust in us and featured Indicia’s sentiment data in their August crypto market preview. Are you ready to do the same? Join us for free now.
🚀 Last week’s market performance
The market grew 1% and Bitcoin (BTC) ended 0.7% up in the last week. The biggest winner of the week is THORChain (RUNE). An increase in social chatter and positive sentiment around THORChain resulted in a 50% gain. Sophia recorded a Bullish score of 29% for RUNE. This was the fifth-highest bullish score over the week. (The highest bullish score of 57% went to Shiba Inu (SHIB), which posted a 14% return over the week). One of the biggest losers of the week was Curve DAO Token (CRV). It continues to struggle after its recent hack and lost 5%. Sophia recorded a bearish score of -29% for CRV.
🧐 What is your crypto mood today?
In each Sophia's Thoughts newsletter, we ask about your crypto mood. Your response to this question helps Sophia get a better sense of the pulse of crypto markets. And this ultimately translates into better insights for you when combined with Sophia's AI models. Your data empowers Sophia to provide you with even better intelligence going forward!
💤 The low volatility cycle
The crypto market is currently stuck in a low volatility cycle. Volatility is a key measure of risk. It captures how much the return of an asset moves on average, either on the upside or the downside.
Traditionally, crypto markets are highly volatile. The average volatility of Bitcoin and the broader crypto market over a one-year period is more than 50%. In comparison, the stock market in the US has an annual volatility of around 20%. That means that normal swings in the crypto market can be almost 2.5-times as large as in the stock market. That is real risk!
Recently, however, the volatility of the crypto market has been abnormally low. In the last 4 weeks, we have measured an annualized crypto volatility of just 17%. Bitcoin has been hovering around the $30,000 mark for months now.
Without volatility, it is hard for investors to identify profitable trades — no risk, no reward! So let’s dissect what’s causing this low volatility cycle. And what investors can do to best navigate the new calm environment.
☀️ The summer hole
We are currently in the midst of summer in the northern hemisphere. And that means that many people are on holiday. There is a clear holiday effect in traditional financial markets. And crypto appears to be equally affected by people’s disposition to take some time off over the summer period.
We started tracking the crypto market in March 2018. Since then, we have measured annualized crypto volatilities of around 66% in any month that is not July or August. During the July and August months, we normally measured volatilities that are 6 to 10% lower than in other months. This year, the contrast is much more stark. The average annualized volatility in July & August was below 22%. That’s only one third of the normal volatility we regularly measure in the crypto market.
The summer hole has definitely introduced a slowdown in the market. But our intelligence suggests that this may not be the full story.
🗓️ Delays, delays, delays
Several recent developments have introduced delays for the much needed regulatory resolution in the US. And investors are anxiously awaiting a resolution.
First, the SEC delayed its decision on whether to approve Ark Invest’s proposal for a spot Bitcoin ETF. The SEC is seeking public input on this decision. Likely, a decision won’t arrive before next year in January. Ark initiated the Bitcoin ETF application in May 2023, ahead of the flurry of subsequent Bitcoin ETF submissions. In a dialogue with Bloomberg, Cathie Wood, the esteemed CEO of Ark Invest, had voiced her expectation of potential delays. She suggested that the market might witness a batch of approvals of several ETF applications simultaneously.
Then, conflicting rulings on whether tokens are securities are likely to delay the decision on how the SEC will oversee crypto. In a pivotal judgment last month, the court determined that public transactions of Ripple do not fall under the category of securities. The SEC now appears poised to challenge this decision. Then, in a distinct case, a judge rejected Terraform’s plea to dismiss their lawsuit. The judge asserted that securities regulations are indeed applicable to open token sales. These developments have shifted investor perspectives and fortified the SEC’s position. They complicate the cases that the SEC is running against Coinbase and other crypto exchanges.
Our CEO & Co-Founder, Prof. Gustavo Schwenkler, was asked on X (formerly Twitter) whether the SEC just wants to destroy crypto in the US. His answer alludes to potential delays that we may face to learn how crypto will be regulated in the US. In a recent Sophia’s Thoughts, we stated that we expect the crypto market to continue to move sideways until a regulatory resolution is found. We continue to stand by this expectation.
📈 Low risk, barely any rewards?
Risk and reward go hand-in-hand in financial markets. When volatility is low, it is harder to identify profitable investment opportunities. Currently, crypto hedge funds are struggling to keep up with the strong market performance from earlier in the year.
Conveniently, our AI crypto intelligence bot Sophia offers unique insights. By combining our powerful AI with the sentiment you contribute in our surveys, Sophia delivers intelligence that identifies profitable trading opportunities even in this low volatility environment. Sophia offers two key signals that can help crypto investors:
Direction is a signal that communicates whether Sophia believes that a coin may gain or lose over the next 24 hours. It can take on one of two values, Up or Down, depending on Sophia’s intelligence.
The Mood signal communicates how confident Sophia is in her directional belief. Mood can take on one of five values. Very bullish and Bullish suggest that Sophia is highly confident that a coin may gain over the next 24 hours. Very bearish and Bearish suggest that Sophia is highly confident that a coin may lose. Finally, Neutral indicates that Sophia expects small returns over the course of the day.
These signals allow investors to sort cryptos every day based on their possible performance.
Since July 1, Sophia has had mostly Neutral moods with a downward Direction tendency for the largest 100 coins in the market. Sophia had a positive bullish signal only 18% of the time. While the bullish signals are sparse, they point to potentially profitable investment opportunities. The coins for which Sophia had bullish Moods generated an average daily return of 0.63% since July 1. Some of the biggest bullish successes Sophia recorded this summer include Ripple (XRP, +73%), Stellar (XLM, +61%), Cardano (ADA, +24%), Solana (SOL, +18%), and Polygon (MATIC, +17%) on July 13, the day the Ripple lawsuit win was announced.
In contrast, the coins for which Sophia had negative bearish Moods lost on average 0.26% over the day. The biggest bearish hits Sophia has had this summer include Ripple (XRP, -11%) and Stellar (XLM, -13%) on July 14, the day after the Ripple lawsuit win was announced.
Equally important as identifying opportunities to buy or sell coins, Sophia’s Neutral Mood also highlights when it’s best to stay put. The coins for which Sophia has had Neutral moods have moved sideways this summer. They have only posted an average daily return of -0.07%.
Sophia’s signals offer powerful tools to help you navigate the crypto market with confidence. That applies both in high and low volatility environments. You can subscribe to the Indicia Labs IL Pro Membership to stay up-to-date on the latest intelligence by Sophia.
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