A rare crypto technical indicator signal has appeared for the first time in over six years. The last time it was activated, the total cryptocurrency market cap climbed more than 7,000% and put the asset class on the map.
Now that the signal is sounding again, is this a prelude to another 2017-style digital currency market explosion?
Why Crypto Could Be on the Brink of a 2017-Style Boom
Volatility is the measure of how much price varies within a time frame. For example, an asset that rises and falls an average of $5 is not nearly as volatile as something like Bitcoin, which can crash by 80% and then rise by 1000%.
The Bollinger Bands visualize volatility over the past 20 periods using a moving average and two standard deviations. When the tools tighten, it indicates a lack of volatility. When the bands expand, they signal intense volatility ahead.
A squeeze setup involves the Bollinger Bands tightening and then expanding to release the energy built up in the trading range. This is exactly what is happening on the Total Crypto Market cap chart for the first time since late 2016.
In the chart below, the Bollinger bandwidth is the narrowest in more than six years. While past performance is no guarantee of future results, the crypto market climbed from $10 billion to $780 billion last time the signal appeared.
A massive move is coming in cryptocurrencies | TOTAL on TradingView.com
Buckle Up: Bollinger Bands suggest volatility ahead
The Bollinger Bands tell us that volatility is on the way, but say little about the direction of price action. For a buy signal, the price must close above the upper band. Until that happens, all we know is that a big step is coming.
However, volatility may move upwards, despite being more associated with a downtrend in financial markets. The VIX, a measure of implied volatility in the S&P 500, is sometimes referred to as the “Fear Index” because it spikes so often during corrections.
Even Oxford Languages defines the term with negative connotations. According to the authority, volatility is the “ability to change rapidly and unpredictably, especially for the worse”.
Simply put, things could get worse for crypto as well. But given the extended downtrend and evidence from the last time the signal went off, this tight Bollinger bandwidth has the potential to produce a 2017-like rally in crypto.