Bitcoin (BTC) has gone through some of its flattest trading in months. Not since mid-May has trading been so boring, when BTC/USD was stuck in a holding pattern around the $440 level. Of course, many traders forgave Bitcoin shortly thereafter as it rallied well into the $600’s and has since retained the bulk of its gains.
This time around, BTC has been stuck in the low $600’s since the beginning of July, a span of over three weeks. BTC has ranged between $600 and $650, making for a total variance of only 8%. In the past, BTC has easily pulled off swings of more than 8% in a matter of hours.
Volume has been dead, averaging about 75 BTC an hour. Total daily volume across all exchanges has been as low as 30,000 BTC. Normal levels are in the neighborhood of 100,000-120,000 BTC.
Such flat behavior is often a prelude to major moves, as evidenced during the aforementioned May rally. As if to mock me, BTC is sharply breaking through$600 on BTC-e as I am writing, hitting $585 in just a few minutes. The drop places it well out of its July trading range on BTC-e. The corresponding drop on Bitstamp was less steep, just barely breaking through its low of $607 during the July stretch. The coming days will likely give a clearer picture as to where this is headed.
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In any event, the argument holds true for the past 3 weeks. Low trading volumes + low volatility = very low profits for bitcoin exchanges. Consider the average exchange charging 0.3% per trade. A 70% drop in trading volume will correspond to a similar drop in profits. If 7500 BTC is the average daily volume, the average daily revenue of 45 BTC ($28,000) is reduced to 13.5 BTC. The effects can be substantial if prolonged over several weeks.
While volatility is more of a meaningful metric for traditional fiat-based forex brokers, here it often plays a direct role in affecting volumes. There are fewer opportunities for swing trading. Long-term traders have no reason to jump on/off the bandwagon as they would during a spike/plunge in price.
The reverse relationship can also hold true, whereby volume influences volatility. In a recent Meet the Experts edition on Forex Magnates, Antony Lewis of itBit describes how volatility can prevail in both high and low volume conditions.
There are several exchanges charging no fees for trades, instead taking a small cut on withdrawals. Some also make money on margin trading, and perhaps even advertising. They are less affected by the flat trade, unless the resulting behavior entails fewer funds coming in/out of the exchange. Perhaps lower volumes may also lower site traffic and affect advertising revenue.
Should the Bitcoin ecosystem ever be strengthened to the point of BTC maintaining price stability, it would be ironic to see all the venture funding that went into building exchanges inadvertently reduce their revenues. Perhaps then the highly leveraged model found with traditional forex trading will be in order.