Bitcoin Indicator That Forewarned Late 2023 Volatility Explosion Is Lighting Up Again

Bitcoin's Bollinger bandwidth has narrowed to levels that have historically preceded volatility explosions.

Bitcoin (BTC) traders bored of the cryptocurrency’s range-bound days might want to return to their computer screens.

An indicator called “Bollinger bandwidth” that successfully predicted the late 2023 volatility boom is glowing brightly again.

Bollinger bands are volatility bands placed two standard deviations above and below the 20-day/week simple moving average (SMA) of an asset’s price. The bandwidth, an unbound oscillator, is derived by dividing the spread between the volatility bands by the 20-period SMA.

Bitcoin’s Bollinger bandwidth has declined to 20% on the weekly chart, a level last seen days before BTC exited its then multi-month trading range of $25,000 to $32,000 in late October. Prices topped the $40,000 mark by year-end and rose to record highs above $70,000 in March this year.

The latest reading of 20% follows four months of trading between $60,000 and $70,000, barring occasional brief dips to $55,000.

The bandwidth flashed a similar reading ahead of the volatility explosions in November 2018, October 2016, mid-105 and mid-2012, as CoinDesk discussed in October.

Bollinger bandwidth weekly chart

Volatility is said to be mean-reverting. So, a narrower bandwidth, representing price stability, often precedes a breakout in either direction or burst of volatility. On the flip side, high bandwidth indicates a cooling period on the horizon.

The bandwidth indicator was created by Bollinger himself and is designed to be used in conjunction with the Bollinger bands. The bandwidth indicator measures the width of the Bollinger bands relative to the average price of the asset. A narrower bandwidth indicates that the Bollinger bands are converging, which typically precedes a period of increased volatility. Conversely, a wider bandwidth indicates that the Bollinger bands are diverging, which usually precedes a period of decreased volatility.

Bollinger bands and bandwidth are useful tools for traders and investors to assess the volatility of an asset and to identify potential trading opportunities. However, it is important to note that no technical indicator is 100% accurate and should always be used in conjunction with other forms of analysis.

Omkar Godbole is a Co-Managing Editor on CoinDesk's Markets team. He joined CoinDesk in 2021 from CCN, where he covered crypto markets, Web3 and the broader financial markets. He has also worked for the Times of India and Hindustan Times.

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