The Bull Case for Bad Volume

Summary.

Bad volume and low volatility may set us up for a 4Q seasonal rally

* Volume
 is bad. Average daily volume this month is on pace for just US$3.7B
– Oct is on pace to be the worst month of trading since Oct of last year
– That said volume this year hasn’t been that far off the seasonal pattern
– Historically Nov and Dec are BTC’s best volume months

* Volatility is extremely low.
– Low volatility often precedes sharp price moves.
– Previous occurrences ≤ this level have been followed by significant rallies

* Seasonality is strongly positive in 4Q
– Bitcoin has been up 4 of the previous 5 Octs and 5 of the previous 5 Novs

  1. Bitcoin volume is bad.

    Many traders are expecting a high volume sell off to signal capitulation. However it can be argued that the high volume capitulation was in February & the subsequent tests of Feb lows on declining volumes have created a strong base from which an acceleration of volume could actually take us higher.

    Chart 1. Average Daily On Exchange Volume By Month
    – MtD Avg daily turnover is now < the Jan 17 — present median of $3.9B.

Historically the best volume months of the year have tended to be clustered around the beginning and the end of the year.

Chart 2. Average Daily Volume by Month
– Ranked from best to worst month of each year. 1= worst. 12 = Best.
– Note that most of the green is clustered around the top and bottom of the table.

While YTD trading looks to be slightly behind the normal seasonal pattern, there’s still a reasonably good chance we could see the usual end of year surge. The normal seasonal pattern is for a sharp pick up in trading in the last 2 months of the year.

Chart 3. YTD Volume vs Historic Trend
– YTD monthly volume ranking vs historic (2014–2017).
– The normal seasonal pattern is for active trading in Nov and Dec.

2. Price volatility is extremely low.

Volatility – as measured by Bollinger Band Width – is at a 720 day low.

Chart 4. BTC Volatility — Bollinger Band Width

There have only been 6 previous occurrences of price volatility this low or lower since 2016. The majority of those occurrences were followed by price gains 20 days and 50 days later. All of these occurrences were followed by price gains 100 days later.

Table 1. Price Performance Following Similar Low Volatility Periods

3. Price Seasonality is strongly positive in 4Q.

BTC tends to outperform into the end of the year. Oct has been up 4 of the previous 5 years. Nov has been up 5 of the previous 5 years. The median Oct MoM gain = 32%. The median Nov MoM gain = 21%.

Table 2. Monthly Price Performance, 2013–2017

Price performance this year — in terms of directionality — has been roughly in line with normal seasonality. If the pattern continues, we are likely to have a strong 4Q.

Table 3. YtD Price Performance vs Seasonality
– Seasonality = 2013 -2017 median MoM %.
– Note the overlap in directionality (red and green) of monthly price moves

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