If you think something is amiss in the crypto space lately, you’re not crazy.

There have been several earth-shaking events in the crypto space over the past few months, some good (Ripple ruling, BlackRock ETF) and some bad (SEC lawsuit, Curve crisis).

Yet Bitcoin barely budged. The normally stomach-churning roller coaster of ups and downs became a kiddie train at the mall.

In fact, since the beginning of August, Bitcoin’s price swings have become negligible, with volatility lower than the average volatility of stocks, bonds and gold combined.

The cause of this is hard to pin down: you could blame it on miners covering call options, institutions doing cash carry trades, Fed rate hikes, moon cycles, or a combination of factors.

The specific reasons are not important to me. It seems to me that the market has been hypnotized into a deep sleep and has been falsely led to believe that this low volatility is a permanent state.

At the same time, what I see is how severe and persistent this deviation from the mean has become, and how ideal the risk-reward profile would be if a reversal were to occur before year end.

Fortunately, we can look back at history to see how low volatility patterns have played out previously, giving us some idea of ​​what’s to come.

Of course, it wouldn’t be a true JJ article if we didn’t throw Old King Dollar in. This week, he can give us some additional alpha to determine where Bitcoin will go once volatility returns.

This is important because this type of ultra-low volatility will not last forever.

Bitcoin is about to fluctuate

If you watched the latest episode of Alpha Bites, then you heard me briefly touch on this topic when I mentioned BVOL (a chart that references Bitcoin’s historical volatility index), and I explained that BVOL is now on the verge of bottoming out.

As shown in the chart below, BVOL has spent most of its time since 2016 in the 40-100 range - which is its natural state.

Until last August, when it suddenly fell off a cliff.

Over the past year, BVOL has failed to break above the 30 level. Not even the FTX crash or news of BlackRock’s big move into crypto could pull it back to normal volatility levels.

In last week’s Blend article, Ben Lilly further elaborated on this theory by overlaying BVOL (white line in the chart below) with the Bitcoin price (orange line). This reveals an interesting pattern that also seems to suggest that volatility is returning.

As we will see below, only three waves were suppressed before this (indicated by the vertical red lines), leading to sharp fluctuations in BTC (red box).

The first example occurred in the second half of 2018, when the Bitcoin market was boring for several months. But eventually, the low volatility trend was broken, causing the price of Bitcoin to plummet by more than 50% in just over a month, from nearly $7,000 at the end of October to just over $3,000 at the end of the year.

Next up was July 2020. Bitcoin was in “zen mode”, enjoying the summer as it consolidated below $10,000 after a crazy run up at the start of the year due to the COVID crash. As I’m sure you remember, it wasn’t long before the $10,000 resistance level was finally breached, and from there the crazy run to all-time highs began.

Of course, there was December 2022, when the market was recovering from the FTX crash. When the price was hovering around $16,000, a group of enthusiastic speculators who seemed to believe that the price of the coin would go to zero went short. However, less than a month later, the price rose back to over $20,000, and a large number of shorts were liquidated.

Now, what is very interesting is that low volatility is not the only thing these three periods have in common. There is another leading indicator that was foreshadowing these moves before they occurred, and now it is about to flash us another directional signal.

To get to the heart of today’s article, let’s take a deeper look below…

RSI: A very scary indicator

The common thread in each period is that our old friend the US dollar, represented by the US dollar index (DXY), has previously foreshadowed major movements.

Every time Bitcoin's volatility has gone from "boring" to "surge," it's the U.S. dollar that's behind it. We can use these signals to measure its momentum by looking at its relative strength index (RSI).

You may remember we discussed the importance of the RSI as it relates to the DXY daily chart back in June, just before the dollar sell-off, BlackRock announced its ETF plans, and Bitcoin surged from below $25,000 to over $30,000 in less than a week.

Following that article, the key RSI level of 50 again became resistance, with the dollar eventually heading to yearly lows below 100 in mid-July.

However, what is interesting is that it is back to the same resistance level. The chart below shows the DXY and its Simple Moving Average (SMA), with the RSI being the purple line at the bottom.

It is worth noting that despite the lower price (102.60 at the time of writing, 103.50 in June), the RSI (Relative Strength Index) is actually higher now (49) than it was in June (47), so a slight divergence is occurring this time.

That’s typically a bearish sign. Still, the dollar’s ​​renewed strength since the July sell-off shouldn’t be dismissed lightly.

Notice in the chart below how it has recently reclaimed its 50-day (green line) and 100-day (blue line) SMAs after retesting them multiple times. This appears to be consolidating and it is indeed on the cusp of a new breakout point and retest of the 200-day moving average (red line), currently at 103.38.

If the U.S. Dollar Index breaks above the 50-RSI and its 200-day moving average, Bitcoin and cryptocurrencies will flame out as I expect volatility to send us spiraling higher.

The downside areas of interest to me for Bitcoin are $24,600 (June low), $19,300 (March low), and $15,300 (post-FTX crash low).

At that point, all bets will be off as the dollar milkshake will do what it does best – suck all liquidity out of global markets before government officials step in and devalue it to new lows.

But believe it or not, the daily USD chart is not the main focus of this article.

What I want to draw your attention to is the monthly chart of the USD, specifically its RSI reading, which gives us a 100-foot view of the macro trend in DXY and provides us with insight into overlays with past periods of low volatility in Bitcoin.

As shown in the chart below, the monthly relative strength index (RSI) for the U.S. dollar index is currently stuck above the crucial 50 mark, which is a strange synchronicity as it struggles with this level as a daily resistance.

Especially when you consider that the 50 relative strength index (RSI) level on the monthly chart is exactly where the dollar was during the first three volatility breakouts that Lilly shared last week.

The monthly 50-RSI line has been a key line in guiding the macro trend of the US dollar dating back to the early 70s. It is well known that due to their negative correlation, major fluctuations in the US dollar have a ripple effect and determine the macro trend of Bitcoin in the coming months.

Above 50-RSI, risk aversion: abandon your Bitcoin and buy it back at a lower price.

Below 50-RSI, Risk: Escape the fiat trap at all costs before fiat overinflates to zero.

It's that simple.

Look at what we have witnessed since 2020. The USD lost its 50-RSI trend on the monthly chart in July 2020 and then proceeded to fall by more than 10% over the next 8 months, plummeting from highs around 90 to around 80.

Then, when it re-crossed the 50-RSI in October 2021 (not coincidentally, just before Bitcoin peaked), it set the stage for a run from the mid-90s all the way to a peak of 114 last September.

If someone had bought BTC when the DXY monthly RSI dropped below 50 in July 2020, their cost basis would have been around $9,000.

If they had sold when the DXY monthly RSI rose above 50 in October 2021, their average selling price would have been around $50,000.

455% in about 15 months isn’t much, but it’s real.

I expect similar ROI going forward if the USD loses this trendline and officially enters a macro bear market by year end, especially if it is combined with a wave of spot ETF approvals.

Some would even say this is a once-in-a-century storm.

But like everything, patience and tact are required.

Wait for signs of a proper decline in the U.S. Dollar Index before taking action, lest you end up on the wrong side of a runaway dollar freight train.