The Bollinger Band uses the moving average of an asset’s chart to determine a volatility range.
For instance, when BTC becomes more volatile, the Bollinger Band widens, indicating a bigger price range is forming. If BTC becomes less volatile, the band narrows, suggesting a small range.
The primary reason why a narrow Bollinger Band indicates a volatility spike is likely because it means the range is getting tighter.
If Bitcoin drops or increases within a tight range, the possibility of breaking down or upwards from the range increases.
As an example, it would be challenging for BTC to break out from a $9,000 to $12,000 range. The price range is broad and it would take significant buying demand or selling pressure for the range to break.
In contrast, if the range is from $10,000 to $11,000, the probability of the range breaking down or upwards rises.
According to Bitcoin trader Nunya Bizniz, the Bollinger Band for the monthly chart of Bitcoin has never been narrower.
The monthly chart covers until 2013 when there was not a proper exchange market in place. Hence, it essentially covers most of BTC’s historical price cycles.
The Bollinger Band width is reaching an unprecedented area that BTC has not seen before. Considering the trend, Bizniz suggested that volatility might be incoming.