Bollinger Bands are used very often to trade cryptocurrencies. In recent months Bollinger Bands have shown a great ease in identifying potential rallies and crashes in Bitcoin.
In 2023, these bands had a good accuracy in identifying two events, one took bitcoin from $16,000 to $24,000 in Jan 2023, and another took it from $24,000 to $20,000 in March 2023.
Interestingly, yet another Bollinger Band squeeze is in formation, possibly taking Bitcoin prices from $30,000 to $35,000 or even higher.
Defining Bollinger Bands
Bollinger Bands is a volatility indicator that shows whether a publicly traded financial asset like a cryptocurrency is overbought or oversold. It consists of three parts:
- Upper Band, which indicates overbought zone and is plotted two standard deviations above the moving average. This indicates the highest price level that is typically possible in any scenario.
- Lower Band, which indicates an oversold zone and is plotted two standard deviations below the moving average. This indicates the lower price level that is typically possible in any scenario.
- Moving Average, Simple or Exponential.
Working of Bollinger Bands
If the upper and lower bands are apart, it shows that the markets are highly volatile. Similarly bands that are close to each other signify low volatility.
If the price moves above the upper band it shows that the prices may reverse back. This indicates an overbought market.
Similarly, if the price moves below the lower band it indicates that the price may rally soon. This indicates an oversold market.
Bands can expand in a highly volatile market and can contract in a market with low volatility.
When bands contract in a low volatile market, the situation gives birth to a special case where the price moves upward very rapidly after going above the upper band. This is called a Bollinger Band Squeeze.
The current market as of 18 July 2023 where Bitcoin has hovered near a price level of $30k, there is a possibility of a Bollinger Band Squeeze. This can be seen in the rightmost part of the Bollinger chart below.
As per Glassnode data, we can expect that this squeeze might be a bullish one. Let us confirm this with some on-chain data.
The current market condition is marked by low volatility because the gap between the bands is just 4.2% with respect to Bitcoin’s price as per Glassnode. We can also see that the price is near the bottom of the Bollinger Bands.
Now this should give birth to a high volatility situation as per Bollinger’s theory.
Also, the price is moving towards the lower band. If it crosses the lower band and bounces back, we can expect a squeeze which will send Bitcoin prices above the current year high of $31,800.
We expect a squeeze because of the strong bullish market sentiments and the entry of several institutional investors into spot Bitcoin ETFs.
These investors have slowly bought Bitcoin along with traditional crypto institutions like MicroStrategy.
The recent flow of funds can also be seen on chain where realized market cap has been increasing since the last few months.
Realized Marketcap signifies the net total of all profits and losses of all transactions done on the Bitcoin blockchain. An increased realized market cap shows that more people are buying Bitcoin at even higher prices.
This flow of steady and experienced money into Bitcoin would not let the markets sink and therefore we expect a Bollinger Band squeeze will only push the prices further up.
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