Bitcoin’s Bollinger Bandwidth Indicates Imminent Volatility

Bitcoin’s Bollinger Bandwidth Signals Potential Volatility Ahead

For traders who have grown weary of bitcoin (BTC)’s recent range-bound trading days, it may be time to pay closer attention to their screens. A notable indicator known as Bollinger bandwidth, which previously heralded the surge in volatility towards the end of 2023, is once again showing significant signs of activity.

Bollinger Bands, a popular volatility indicator, consist of bands that are positioned two standard deviations above and below the 20-day or weekly simple moving average (SMA) of an asset’s price. The bandwidth itself is an unbound oscillator calculated by dividing the distance between these volatility bands by the 20-period SMA.

Currently, bitcoin’s Bollinger bandwidth has contracted to 20% on the weekly chart. This is a level not witnessed since just days before BTC broke free from its multi-month trading range of $25,000 to $32,000 in late October. Following that breakout, prices surged past the $40,000 mark by year-end and skyrocketed to all-time highs exceeding $70,000 in March of this year.

The recent bandwidth reading of 20% comes after an extended period of trading between $60,000 and $70,000, with only occasional brief retracements to around $55,000. Historical data suggests that similar bandwidth levels preceded significant volatility spikes in previous years, including:

• November 2018
• October 2016
• Mid-2015
• Mid-2012

As discussed by CoinDesk in October, the nature of volatility tends to be mean-reverting. Hence, a narrowing bandwidth, indicative of price stability, often signals an impending breakout in either direction or a rapid increase in volatility. Conversely, a high bandwidth typically points to a forthcoming cooling period in market activity.